It’s All About the Fed Today

  • As we enter Fed Day, Treasury yields are steepening just a bit, but it will mostly be a low volume affair until we get to the 2pm ET announcement. The 10yr finished about 10bps lower in yield yesterday off the cool CPI report and closed at the psychologically important level of 3.50%. Currently, the 10yr is yielding 3.51%, off 3/32nds in price while the 2yr is yielding 4.19%, up 1/32nds in price.  The 2yr – 10yr inversion has narrowed some as the CPI report reduced the odds on some of the more aggressive rate hiking scenarios. The inversion is currently -68bps vs a cycle low of -84bps set a week ago.


  • The Fed will no doubt be pleased with the latest CPI report, but it may not alter too much their projections for this meeting given their mantra that a single report does not make a trend. Of course, the retort to that is the October report was cool as well. In any event, the Fed still has a destiny to terminal and what that level is should be a bit clearer this afternoon.


  • After the 50bps rate hike today to 4.25% -4.50%, the Fed meets next on February 1, and if the December CPI numbers follow in line with what we saw in November, it could be a 25bps hike followed by another 25bps in March, but we are all but certain to hear that that decision will be data dependent.


  • One thing that the Fed will want to accomplish today is to add conviction to their higher-for-longer theme. The dot plots offer one opportunity to present that versus what they showed in September. In that dot plot they expected 75bps in cuts in 2024. We are likely to see much less in the way of cuts this time as the Fed tries to prove it is serious about staying at terminal.


  • The market still sees rates peaking just over 4.80% (4.75% – 5.00%) early next year and then 50bps in rate cuts by year end 2023. The soft CPI data certainly didn’t dissuade investors to alter that forecast. So, the Fed will have a heavy lift to change investor perceptions on that, we’ll see how they do. For our part, we think they will show a terminal rate of 5.00% – 5.25% in this forecast and hold it steady through 2023.


  • We received one last bit of inflation information this morning before the Fed decision, and it was another positive read on declining import prices.  November Import prices fell -0.6% for the month vs. -0.5% expected and -0.4% in October. The YoY Import price rate dipped to 2.7% vs 3.2% expected and 4.1% in October. Export prices also fell for the month down -0.3% vs. -0.5% expected and -0.4% in October. The YoY export price rate dipped from 7.4% to 6.3% but that was above the 5.7% forecast. All-in-all, a positive read on import prices that continues to play into the thought that peak inflation is behind is.


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.03 4.81 4.74 4.73 4.84 5.30
0.50 5.02 4.78 4.68 4.62 4.70 5.19
1.00 5.01 4.75 4.65 4.58 4.61 5.06
2.00 4.74 4.59 4.50 4.49 NA
3.00 4.45 4.43 NA
4.00 4.38 NA
5.00 4.34 NA
10.00 NA

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Published: 12/14/22 Author: Thomas R. Fitzgerald