Doves fly at the Fed as official signal they are done raising rates, instead raising the number of rate cuts they see next year. Officials left the overnight rate unchanged at five and a quarter to five and a half percent, but they essentially confirm that's it. The money quote from the statement gets a one word addition in determining the extent of any additional policy firming that may be appropriate
to return inflation to two percent. The dot plot meanwhile sees seventy five basis points of cuts next year, one more move than they saw in September. The dispersion is wide, however, with eight seeing fewer than those three cuts, five seeing more than three. In twenty twenty five, they see an additional four rate cuts, one down from September and two more in twenty twenty six. The longer run neutral rate
remains at two and a half percent. Their move comes as they significantly lower their median headline inflation forecast this year to two point eight percent. As the statement notes, inflation has eased over the past year but remains elevated in the median forecast. It falls further in twenty twenty four to two point four percent two point one percent in twenty twenty five and two percent. Finally, in twenty twenty six, core pcee inflation three point two percent this year,
down from September's forecast of three point seven percent. It keeps falling, hitting two percent also in twenty twenty six. The statement says, quote growth of economic activity has slowed from its strong pace in the third quarter, but they still revise their median forecast for GDP growth this year significantly to two point six percent from two point one percent in September. It falls to just one point four percent next year. Potential growth in the longer run is
seen at one point eight percent. No change in their unemployment forecast of three point eight percent this year, which implies the jobless rate moves up in December because it's three point seven percent right now. The next three years, the median unemployment rate will come in at four point one percent. The decision guys again unanimous.
Mike McKay, Thank you sir. Let's make it very simple. The twenty twenty four dot implying three cuts next year from this federal reserve. It doesn't meet the market, but it closes the gap and endorses the direction of travel over the last four to six weeks in the bond market. This is what's falling right now, yields and falling hard. We're down nineteen call it twenty basis points lower at the front end of the curve on a two year, four fifty three. On a ten year, down thirteen at
four point zero seven percent. Once you figure out where the bond market is, take a guess where the FX market is. The dollar looks a little something like this against the Euro at the moment, weaker, the euro stronger, one away forty five. And if you look into equities, we endorse move higher by a half of one percent this morning on a S and P five hundred, up again this afternoon on the Nasdaq by four tenths of one percent, Lisa, the rally moves on.
We could end up getting a sub four percent tenure yield by the end of this trading session. As the AS people pass through this to me, the fact that this is unequivocally dubvish, that they endorse the Fed's idea, that the market's idea of rate cuts and then some really speaks to a question of is there going to be clean up acted on I on one or is this going to be Fed chair Powell saying, we're just responding to the data in front of us, and it looks pretty good.
Well, we talk about tom, the risks, the potential of being whip swored by Chairman Powell at about twenty seven minutes time. The early take, and we'll see if it sticks. The early take is this. Ultimately you're looking for three cuts next year. Our four or five cuts no longer stands that ridiculous. Now you come closer and closer to where we were before no hedging here.
I was going back and forth with a professor at the University of Cambridge and two standard deviations down on tenure yield. John, we almost came to it. We came very very close to a four point eight percent, four point oh seven head four six. Well, to see what plays out with the press conference. But this is frankly more than we expected. We also expect wonderful conversation at this moment with Diane Swarks, she's chief economist at KPMG. Dan, you know, the interest space is the litmus paper of
our economic and our FED system. Are we seeing a constructive reduction in yields or does this signal slower economic growth?
Well?
I think what we're seeing is that the bond market is leaning into the concept of the fact that inflation has plummeted so rapidly. I think this is a full inflation story. There's no question that the Fed has showed its cards here. They're very excited about the fact that inflation has come down at its fastest pace outside of World War Two, the Korean War, and the Vulcar recessions.
That is really stunning given we've not seeing a major increase in unemployment with that, and they're feeling good about it. And I think you're going to see some of that euphoria from Chairman Powell as well. It's more than we expected that. It is important to remember that remember last time they had a rate hike Pope before the end of the year, So just by removing one rate hike out of it, that puts one more cut into twenty
twenty four as well. And I think that sort of nuance is lost in translation, but it is part of the story as well. As they're not really backing off higher for a period of time. The next question is higher for how long? Some big things thinks we might be close to higher for long enough.
Some big moves in this bond market right now, we're down seventeen basis points on a front end, or a two year at four fifty six on a ten year, down eleven to four point zero nine percent alongside down swamp and place asch Greg Peters of PGM jumps in front of the camera. Greg, let's talk about it in about twenty four minutes time. Chairman Power has an opportunity to clarify some of this. Do you think it needs to.
Well, well, I'm not sure there's much you can do at this point. I mean, the market just absolutely loved, loved this result. I thought the market was already leaning a little too much. Evidently that wasn't the case. We weren't leaning enough. So, you know, doves fly and bulls run after this, and I think it's really hard for how to put that genie back in the bottle.
Sees that give you a sense doves flying and bulls running, the idea of FOMO and just how much that's taken over the market after so many people missed out in five percent tenure yields.
I think that's just artifact of the current market, right. I mean, the markets are much more volatile, They moved much more powerfully. I think that's just the construct right with CTAs and al those and other sorts of things. And I think this is the world that we live in, honestly, So I don't think this is a unique feature anymore. I think this is quite commonplace.
Ye, Dan Swank, I did the nominal GDP math here on the inflation gestament and the growth gestament, and boy, it sure looks to me like a four percent nominal GDP even south of that modeled out over the next twenty four months. How do our viewers and listeners react to that? If our animal spirit post pandemic diminishes down sub four percent?
We know what's interesting about it is also the part that we didn't talk about in the SEPs is that the Fed's long term estimates of what the neutral rate on the FED funds rate, if you look at their ranges, that has actually continued to move up. And so I think what you're seeing here is an economy that the FED expects to cool below potential unemployment to come up
a little bit, although we might not. The consumer has really taken everything the Fed's tried to deal them, and you know, taking it with stride and kept on going and I think that may mean some upside risk to the economic growth side of this situation. But it's really interesting that the Fed's terminal rates now look like they're starting to move up even more than they were last time, and that seems to have gotten lost in translation.
That's not what the market's focused.
On right now, But I think the FED is looking at an economy that's more resilient and that will take off more rapidly as rates come down.
Does that co here with what you think that basically we're talking about a higher neutral rate as we have no landing or a very very soft one.
Exactly.
I think we are at a higher non inflationary rate, and I think that's something you see it just in the slowness with which the FED puts out its cuts and not getting back The scent on rates is not as rapid as the accent on rates and the need.
You see it in their long term forecast. Even as all this good news has come in, it's come in and it's really shifted the narrative in terms of, you know, we're trying so hard to get up to in inflation target for so long, the FED does still believe that we're in a world, and it sort of was illustrated by the volatility and the bond market. We're just talking about that we're in a world that's more susceptible to external shocks and.
It once was.
We've also gotten incredibly good news on oil prices coming down, helping to spill over into inflation.
All of that's great.
It doesn't mean that we're going into the world of subpar growth, of inability to get inflation up that we left in the twenty tens. We have healed balance sheets except for the federal government, quite significantly since then, and I think that's where the paradigm shift is.
Diane, Let's go through the projections together. The median for twenty twenty four GDP one point four percent, unemployment four point one, core PCE two point four, Fed funds four point six.
Dan.
Not so long ago you and I used to talk about this being aspirational. How realistic is it now?
It now seems entirely possible. And you know what, more things than I can list have surprised me about this economy and this is not where we thought we'd be. But how glorious it is that we're here. It's not been easy. It's not as if interest rate sectors aren't feeling pain.
They are.
The housing market is still stuck in a mortgage winter, even though rates are coming down. This will help out unlock some demand, but prices are still too high and the supply of homes is still too much in a shortage, especially in the single family home market. So we know there's still strains in this economy. But the good news is we didn't have to get here without the kind of pain that you know. I think back on that speech eight minutes, thirty four seconds August twenty twenty two.
It was like a bucket of ice.
You know, whether cha Chairman Powell really believed we would have to go through a recession in order to rid ourselves of this inflation and that's just not been the case. Much more of it was supply chains uncurling and the problems that we had there, along with some time to let demand the production pick up with demand, and I think that's important.
Otherwise known as transitory, just not called transitory, Greg, could you buy into this this.
Was that we're transitory over a much longer period of time.
But Peters, can you weigh in a little bit on whether you think this is plausible, or whether you would lean against us right now, or whether you would actually even sell and wait for a better buying moment.
I mean, I do think the markets are really pushing the limits here. There's so much good news being priced in, whether it's inflation, whether it's growth. You know, the yield curve is still inverted, right, and so like, how do you reconcile the fact that investors are feeling really good about the growth outlook, inflation's coming down, and the curves inverted, and so I think there's still some repricing ahead. I think there's still quite bumpy elements.
In the road ahead.
And so yeah, I'm I'm kind of thinking the market is really taking this to the brank here, and I'm and I would be inclined to go the other way, Greg.
I'm looking at money market funds five percent and all the other stuff we blather about each and every day. And I know we get convexity in the stock market, do we get convexity in the bond market? When I got a ten year old yield poping to one point nine to one, I got the ten year yield on plus excuse me, minus two standard deviations right down on four point ho six percent. Can there be such a thing as momentum in the bond market? Price up, yield down?
Yeah, I think you're saying it, Tom.
I mean, if you look at the total return in the bond market over the past month or so, it's been you know, quite astounding, right know, anywhere from five to you know, eight percent.
That's real money, right, And so you've seen it.
And so there has been some quote unquote positive convexity just given the low level of prices.
Right. But but you know, the real question is not what happened, but where are we going?
And so you know, once again I worry about, you know, the current market really squeezing a lot of the total return out of the market way too soon.
Well, look at the move this afternoon. It's a monster move. We're down almost twenty basis points at the front end of the curve. And let me to share a quote with you. It would be premature to conclude with confidence that we've achieved a sufficiently restrictive stance or to speculate on when policy might ease. Chairman Pal not even two weeks ago on December one, Diane swam In fifteen sixteen seventeen minutes time when we hear from the chairman again, why would the message be any different.
Well, I think he's still going to be cautious in his messaging. But you know, you saw a little bit of the lightness in his step. And we saw the bond market rally November first, even though we had what was a hawkish set of you know, in September, a
hawkish outlook. By November one, you saw the market unwined significantly since then because of how you four and a little bit excited that Terre Powell was in that press conference, and so I think it's going to be hard for him to walk back a lot at this point in time. I think it would do him good to be cautious and to be a little bit you know, contingent on you know, we're excited, but here's the risks.
But I think it's going to be hard.
Given they signed off on this statement, and they signed off on this forecast, and this is a dubbish is about as dubbish as we could have expected. I this is more than I expected in terms of dubbishness. And I think it's hard for him to walk it back. And I don't think he would be walking it back all that much given the fact that they all.
Signed off on it, which is the reason why you're seeing it.
I going to add to it.
Yeah, he's not going to push back too.
Much, which is the reason why.
It's a good point that you're seeing an eighteen basis point drop in the two year yield as time goes on, five point four point five to four percent. Greg you said you'd push back against this. The market's really taking this to the brink. What makes you feel that way? And what could you hear from share Powell that could change your mind?
Well, so, I'm not sure I'm going to hear much from CAA. Powell.
You know, as I mentioned, I think the genies out of the bottle. I think it's hard to walk this back. I think at some level he is quite pleased, and rightfully so. Right they've seen a tremendous amount of dissemplation come through during the course of this year, and that's
something to be proud of. But I guess just from a market pricing fixed the income perspective, you know, do we really want to be in an environment where we're taking down yields so aggressively, where we're basically to see these rate cuts come through and then some in order to achieve toald return. So you know, to me, it's just a balance about risk reward and what's embedded in
the price. And I think, quite frankly, there's a lot of good news embedded in the price, and that's always something that you should, you know, take a step back a.
Ton of good news price. Then over the last month, Greg pay this, Diane swamp to at the very best going into this Federal Reserve news conference, Chairman Pound at about fourteen minutes time, thanks to both of you, let's talk about these moves. No big changes to that statement, no change in the decision, but some monster changes to the projections. Take twenty twenty four, for instance, FED Funds medium dot now four point six percent. Back in September
that was five point one. This is a FED some median dot implying that maybe three cuts are in our future from this Federal Reserve. The market maybe fifty basis points lower than that. But ultimately, Lisa, we've closed the gap and we've endorsed the direction of travel over the last six weeks, which is why you've got this monster move again on a two year by nineteen basis points of four to fifty three. So if you don't stop the direction, if you don't stop the momentum, what happens.
You did more the same day, Lisa, it isn't that what's.
Happening, Which is what Pria Misra said that this was the asymmetry, and this is what Greg Peters as well as Diane Swank both said, which is it was more than they expected and certainly more than the market expected, and the market is cheering. Basically, this message is that Chairpower cannot walk this back. The rest of the Fed
members put this in. So he either leans in, either gives an explanation of weakening in the economy that isn't seen in the projections, or he kind of equivoquates and basically is, you know, circling around with his tail.
Neil Datta renaissance, macro super modest. Do you want to quote complete vindication of a March cut? Ninety five? Is a good analog? Surgical cuts are coming. Buckle up, risk, appetite has room to run. Well did he nail it? He nailed it for sure. Check out the scores going into the news conference on the S and P. Five hundred and fourth day of gains on the carts unless Chairman Powell messes that up for you. On the s and P five hundred up zero point six percent on
the SMP. Into the bond market. I know we've seen some big moves in fixed income, but these are big moves again. We're down twenty basis points on a two year four fifty three fifty three. We've seen big moves coming into today's decision. We're down large again. We're down twelve on a ten year at four point zero eight percent. Let's continue the conversation with Bank for America's Michael Gapan. So Batri Jappa of sock gen so Bad refers to you, you've had some time to chew over this one.
What's you take on it?
Yeah, definitely the dubbishness in the dots caught me by surprise. But I think it seems like they're looking at inflation starting to come down. Maybe they're looking at three month and six month moving averages and doing exactly what they did a couple of years back. When you know, they're looking at three months and six month moving averages, which we're running a lot harder than the market, and so
they had to come in and start hiking. So I think you're looking at a very similar scenario here where they're willing it seems to adjust policy.
Given the data that we have right now on inflation.
Michael Gape and thrilled to have you with us, particularly with the reach of the Bank of America across all of America, the consumer, the pulse of our seventy percent consumption. Do you buy this idea of the massive potential GDP slowdown of the next two years? Sub two percent real GDP inflation that's quite acent nominal GDP, it's four percent if we're lucky. Is that the evidence that the Bank of americacies.
Unbalance?
Yes, So our ba A card data has been showing resiliency and consumer spending, a pretty good holiday spend. So our view is the slowdown, if we get one, is going to come in your non consumer related components, business spending, the fiscal drag, and so forth. So we think it's possible. We think the narrative around the idea that you don't need as much labor market pain to bring inflation down.
The data is kind of confirming that, and it matches with what we're seeing from our card data and around the health of the consumer.
So yes, the.
Economic activity should moderate, even personal consumption spending should slow. But we've gotten a lot of evidence here now over the past few months that maybe we don't need to crimp demand as much to return inflation to two percent, and we can allow some of these supply side factors, whether it's supply chain or the rebound in the labor force to help us out.
Michael, could this rip boring rally go against that? Could it make it more difficult to achieve the actual end of the soft landing by rejuvenating certain demand and rejuvenating animal spirits.
Possibly, But I think you know from the FED kind of modulates demand right, that they don't really control the supply side as much. And so I think what the balance here is to say, Okay, maybe demand picks up a little bit, but that's probably more about the timing of the cuts and the pace of the cuts in that end terminal rate rather than the direction of travel. So yes, there's a risk that things would ease to quickly. The FED prejudges this and they have to come back
later and backtrack. That's going to be around the wait and see and how much confidence that they have in order to start a cutting cycle. But I think that's more about the timing and the pace of cuts than it is about having to.
Backtrack so badre you and many other people were expecting hawkish pushback. That was actually the consensus belief coming into this meeting. Does anything about this statement make you rethink how you would respond to this that basically load the boat fomo is on, let's go.
Yeah, I know, definitely.
I mean, I think the Pomo trade has already happened, right, We've had ten years declined from five percent all the way down to now close to four percent in a very short amount of time. So you know, I think I would have to agree with the statement you read from new data earlier, which is maybe the market is looking towards a much more of an adjustment and policy as we go along motors OPPRANDI from the Fed.
I mean, that's not our view.
We still think that the FED is going to keep policy on hold at least till till May, so they see a very clear signal that inflation is trending towards their two percent target, and we think that the economy broadly speaking, should hold up up until that point because it's I mean once we get to that point, I think the FED can very quickly cut freights innovation amount
of time if there is a meaningful store on. The risk is that if they deliver these cuts too soon, then you could see perhaps a resurgence of this sort of services side inflation that we've been experiencing over the last couple of years.
John, I'm going to predict that everybody's going to go in and they're going to blow up their call. They're going to blow up their year end Outlook, I hear all this good talk. I think Michael Gabin is absolutely dead. It's not that it's both. This is this is really really important. This goes back to Diane swamp Gino, Martin Adams and others. This to me is far more a real economy analysis redounding back to these dynamics. In the last two minutes, John, I got a four oh seven
retest of the ten year yield down thirteen beefs. If that puppy breaks through four point zero six, that is a massive signal that everybody has to rip up the script this afternoon.
Reach out to early this morning that if the party started at the end of October. Governor Walla bought the tequila in the last couple of weeks.
It's not him.
I don't think we need to talk about I think we need to be talking about New York Fed President John Williams.
Mike.
I remember when President Williams a number of months ago engaged a conversation about reducing interest rates as inflation continued to fall, just to keep real rates stable and so ensure that things didn't become tighter over time. Is it too early, too premature for chairman Power to engage in that type of conversation in this news conference.
I don't.
I mean, so, maybe I'm a bit of a contrarian here, because you know, we thought the medium dot would come in at four to six. We expected to shift in communication. So what I'm hearing today so far is in line with what I thought. So I do think it would be a proper first step to get out of a hawkish bias and a hiking bias and then start getting into a world of you know, talking at least about a more balanced reaction function, not ruling out hikes, but
also talking about conditions under which you might ease. You have to start moving in that direction inflation, at least at the moment is decelerating fast enough where it's not crazy to think you could cut in March if you're a committee member based on inflation alone. So there's not a lot of time to prepare between now and then. So it's something I think you do need to entertain.
So Aboudra, I'm curious your view on something we were hearing from died Swank that this sort of soft landing implies actually a higher long term neutral rate, that essentially there is more strength in this economy that can handle rates at a higher level. Are you seeing that within some of these projections and kind of adjusting your expectation just for that base of where the Fed's going to ultimately cut too.
Yeah, that's and I completely agree with that.
I mean, our view is that the FED will cut rates by one hundred and fifty basis points next year, and there will be more cuts in twenty twenty five, with the FED funds rate getting a little bit north of three percent, so that's you know, pretty much getting down to where they have their long run neutral rate of two and a half percent.
So of trajectory makes sense.
The question really is what does the curve do under the circumstances and that's really where I feel like there's the story of the rebuilt in term premier is still very much in play because the demand dynamics are still very skewed. We still have a decent amount of supply, and I think that that could lead to a meaningful steepening of the curve.
That while the cutting happens.
The sobrieter to the heritage of derivatives at Sakchen where I have no idea where this happens. But if we have a foot, what does at least the money market fund now five point what well, five point five point at what points so subted? If we bring the money market fund down, does a wall of money try to find a new warm place.
Yeah, that's that's the risk, right. We have almost six trillion in money market funds. That money is the returns are not attractive. Are going to try to migrate towards other parts of the of the ill curve?
Or give me a level? I mean, this is so important. Is this going to happen at four point eight percent?
Do we got to wait?
Wait for three point eight percent? When is the money market game over?
Well, when the curve dis inverts, perhaps at the current time two year yields is still higher than where tenure yields are, and so you're going to see money continue to flow into the into the very front end of the yield curve.
At some point. I think that when the market, when when.
Cuts have been sufficient, cuts have been delivered, and it's been stimulative, I think that you're going to see that money migrate towards risky assets or other higher yielding assets. But at the current time, you know, with the curve inverted, I think that the front end still looks quite attractive to us on a duration adjusted basis.
Let's play questions for Chair and Pound the news conference about three minutes away. Michael Gapin, what would you ask today?
I mean I would ask kind of what you One question would be what you're referencing, essentially, is what's the purpose of the cutting cycle to get policy easy to track a real rate of interest that you think is appropriate. If so, what's what's that rate? The second I would ask him is policy really restrictive? What evidence outside of housing do you have to suggest that that policy is
currently restrictive? So that'd be a bit of a counterfactual to his view, and otherwise the third question I'd ask is you know, is it feasible just to make it clear, is it feasible to cut on the inflation data alone? Or do you need to see weakness and activity in the labor market.
Those are three you don't get through Markey, lucky. If you get two, if you might make if you get one, Bach give us the final word. What would you ask today?
I'm curious to see the federal be inclined to deliver sort of you know, adjustments in policy like they did back in the nineties, because that's something that the market is looking towards. This Perhaps they adjust, they stay on hold, and then they cut some more if needed. So it's not sort of your conventional sacke I think to me that's a very underpriced risk in the market is a ninety style rate cut cycle.
So Maatri Jappa, Michael Gapin to the two of you, thank you, just put in as always Michael Gapin over at Bank of America, back in the seat, and good to see. Absolutely now do it looking for three cuts to go into that median dot in twenty twenty four at least? So I think he's right to talk about not just dates but thresholds. What is the bar where is the bar or when you start to deliver those cuts,
what are you looking for? And now you've priced that implied that in your projections, have they got to engage in that conversation over the next hour.
It is lower inflation enough, right just by de facto? Or do they have to see some other sort of weakness? And what are the parameters? What are the levels?
These are important questions.
I also just think that right now, what's he going to say other than just read it and we've got some sort of new sense that we are disinflating and it's a positive thing, and we'll be vigilant and watch.
It and go with where we think.
It's a brook preserved from our guests. They did not expect this. I did not expect this. This is a sea change shift back to the regime pre pandemic. And John, you nailed it bringing up John Williams and the idea months ago of a shocking reset to the our star before the pandemic, and today is a massive shift, a sea change moment in terms of getting beyond the pandemic.
I went over this quote a little bit early this morning of Chairman POWs not even two weeks ago. It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy my aid.
This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple Podcastsoundcloud, Bloomberg dot com, and of course I'm the terminal. I'm Tom Keen, and this is Bloomer