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Fed meeting tonight. They're probably going to hike 50bps, putting rates into the 4.25%-4.5% band... Then they'll publish some forecasts which will be as useful as a chocolate fire-guard before Boss man Powell chats for a bit. Everyone will see what they want to see regardless of what's said and none of it will make much sense.
Just trying to manage expectations!
Despite all of that, we'll be paying attention. Once the dust settles, there should be some clues in the aftermath.
The 50bps hike looks nailed on
Inflation IS coming down from the peak rapidly, but that's the easy bit. It's way too soon for the central bank to claim victory. To hike by only 25bps would probably set off another risk rally so it's doubtful they'd slow hikes without warning. We'll probably see a nod towards "encouraging progress, but inflation still well above target and lots more work to do"
Which brings the projections into focus. The Fed's best guesses on...
- Economic Growth
- Interest Rates
Goldman think those projections will remain pretty much the same for 2023. Still very much a 'soft landing' scenario 👇
Those interest rate dots (guesses) will probably be a bit higher than they were last time out...
Here's the September projection 👇
And here's where Goldman see it this time round 👇
Higher for longer throughout 2023, cuts in 2024 (from a higher peak) and 2025 before rates settle back at 2.5% in 2026 or later.
“The median dot is likely to show a higher projected peak of 5-5.25% in 2023 (vs. 4.5-4.75% previously). Beyond 2023 we expect that some but not all participants will pencil in slightly larger cuts than they did in September from the new higher peak.
“We expect this to net out to a median dot of 4-4.25% in 2024, implying 100bp of cuts (vs. 75bp previously), and 3-3.25% in 2025, implying an additional 100bp of cuts (vs. 100bp previously).”
None of this matters...
Unless the market finds it credible. For now, rate markets are pricing a couple of cuts for next year.
And it's hard to know what Powell and the team can say that will convince the market otherwise.
- Lean too hawkish and nobody will believe them.
- Lean too dovish? Shitcoins and memestonks will rise from the dead like a zombie army.
Which is why it's likely that any hints of slowing the pace of rate hikes or being near the end (pause) of the hiking cycle will be offset by a line to reinforce that higher for longer message 👇
“It is likely that restoring price stability will require holding policy at a restrictive level for some time.”
Bottom line: Whatever the Fed thinks or says, the market doesn't seem to be agreeing. The data's in charge now.
Inflation's clearly slowing, but the Fed can't admit they're worried about going too far. The fear of being interpreted as too dovish is real.
The easy part's getting inflation down from 9.1% to 7.1% in five months. There might be easier gains ahead too. But it's a LONG way back to 2%.
Already we're seeing oil & gas prices pushing away from the lows amid colder weather, plus those China reopening hopes, and the potential for supply disruptions down the line.
Another round of energy-driven inflation next year would really put the cat among the pigeons.
Anyway, it's hard to imagine much in the way of notable, new information coming from the meeting tonight, but we'll keep an eye on it just in case. Surprises always happen when they're not expected. That's what makes them surprising.