Fed’s Dovish Pivot Resets Rates Lower

  • The Fed’s dovish pivot on Wednesday caught the markets and almost all Fed watchers by surprise. The consensus call coming into the meeting was how much push back Powell and Company would apply to the market’s more aggressive rate-cutting expectations. Instead, the Fed moved closer to embracing the market’s view. The increase in expected 2024 rate cuts to 75bps vs. September’s 50bps forecast, combined with the lower terminal rate, provided the fuel to send Treasury yields lower and stocks higher (see updated dot plot below). Furthermore, when Powell mentioned that rate cut discussions were a part of the meeting that added more fuel to the rally.


  • The question now is will these lower rates hold, or is it just an overdone rally that will correct in the near future? Given the robust move some consolidation is probably due, but expecting a return to yields substantially above 4% for the 10yr may be wishful thinking with a Fed expected to ease multiple times in 2024, and with an improving inflation trend that looks to continue next year.


  • Meanwhile, NY Fed President John Williams in a CNBC interview this morning is walking back some of the rate cut discussion comments that Powell offered in the post-meeting press conference.  Williams said that the central bank isn’t “really talking about rate cuts right now.” He offered that it was more a case of members discussing their rate projections via the dot plots and the updated Summary of Economic Projections.  Yields have backed up by a handful of basis points so let’s see how the comments reverberate as the day progresses.  It’s probably not surprising that we’ll see some push back in upcoming Fed speak in an attempt to temper some of the post-FOMC exuberance.


  • In Williams defense, the numbers we saw yesterday certainly didn’t buttress the dovish turn. Retail sales for November came in better than expected while initial and continuing jobless claims didn’t indicate any material slowing in the labor market. Expecting the demise of the consumer and the labor market has been a widow-maker trade this year, and it looks like both are not fading yet.


  • In addition, the updated retail sales figures boosted the Atlanta Fed’s GDPNow estimate for the fourth quarter from 1.25% to 2.6%, which is right where the Fed has the full year projection. The  Fed also has GDP slowing to 1.4% in 2024 which plays well with their updated rate projections, but to date that weakness remains elusive.



Updated Dot Plot – 75bps in 2024 Rate Cuts and 100bps in 2025

Source: Bloomberg

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Published: 12/15/23 Author: Thomas R. Fitzgerald