Fed Recap:

by Michael Reinking, Sr. Market Strategist
March 20, 2024 5:00 PM ET
DOW 39,512 (+401), S&P 500 5,225 (+46), Russell 2000 2,075 (+39), NYSE FANG+ 10,064 (+176), ICE Brent Crude $86.24/barrel (-$1.14), Gold $2,189/oz (+$29), Bitcoin ~67.5k (+2935)
  • Fed Funds Target Unchanged at 5.25% - 5.5%, as expected
  • Connecting the DOTs
  • Risks More Balanced but Need More Confidence
MAC Desk Commentary:
Today the FOMC left the Fed Funds Target rate at 5.25% - 5.5% shocking absolutely no one. The only change in the Statement was an upgrade in the language describing the labor market to strong from moderating. The Summary of Economic Projections was the wildcard at 2:00. There were some changes to economic forecasts with GDP forecasts being revised up to 2.1% from 1.4%, unemployment ticking down to 4.0% and core-PCE revised up to 2.6% from 2.4%.

The focus was on the median forecast for the Fed Funds target, aka the DOTS, and I think there were some hawkish undertones. The previous forecast implied 3 rate cuts and that remained steady as  only one of the six officials at the key projection of 4.75%  - 5% moved higher. If one additional member had moved off that level the median would have shifted to 2 cuts, but it is notable that the members that were below the median did shift expectations higher leaving a reasonably tight consensus.  However, as we’ve been noting there has been more dispersion in the out years and we are starting to see minor adjustments higher with projections for 2025, 2026 and the Longer Run rate all moving slightly higher. This reinforces the two L’s message we discussed in February sticking with higher for longer and potentially less rate cuts. Treasury markets rallied on the press release, but the hawkish nuance ultimately emerged as the yield curve began to re-steepen. As markets were somewhat fearful of a hawkish pivot and a drop in the 2023 DOT, equities traded modestly higher.

Chair Powell took center stage and as we had anticipated his commentary didn’t veer much from his Congressional testimony a couple of weeks ago. He seemed unphased by the recent bout of inflation data pointing to potential seasonality effects and once again suggesting that the housing related inflation will ultimately cool down. He continued to say that rate cuts are likely this year, but more data is needed to have confidence that inflation is on a sustainable path to 2% but did suggest that the risks to their dual mandate are moving back into balance. He gave his own nod to the 2L’s saying they are committed to their 2% inflation target, willing to keep rates higher for longer and said he doesn’t believe rates will see “the very low levels seen before”.

The Chairman did say that discussions about when to slow the pace of QT are being had but there were no specifics yet, while saying this is expected “fairly soon”. He did suggest slowing the pace while reserves are still “abundant” will potentially allow them to go further with the unwind. He also reiterated comments from Fed Waller a couple of weeks ago that the preference is for the balance sheet to be mainly Treasuries but said no decisions had been made yet. Waller had highlighted his preference for shorter maturities which also adds to the steepening dynamics.
Overall, I think the Chairman’s tone was slightly dovish, especially relative to the building macro narrative. He had multiple opportunities to drop the hawkish hammer and did not pointing to the risk management exercise in cutting too early and spurring inflation verse staying too restrictive and causing unnecessary economic weakness. Ultimately not much changed today. As we’ve been highlighting recently, markets are willing to accept a slightly higher inflation and rate environment as long as that is being accompanied by strong growth dynamics and this is another example. Getting passed this meeting did remove a potential overhang and it still seems like the Fed wants to cut rates but needs the data to cooperate.  There was very little volatility in financial markets, uncommon for Fed day's, with a broad one way move higher in equity markets. There was some re-steepening of the yield curve with 2yr yields down ~10bps while 10yr yields were only down 2bps (30yr +2bps). See Chart of 2/10 spread.


The USD index reversed early gains breaking back below its 200d ending the day down ~0.4%. This reversal in turn helped commodities reverse early weakness with Gold back near all-time highs again. There was also a big reversal in Bitcoin which ended the day up ~4% at ~66.7k after breaking below 61k overnight.

Before we start thinking about the basketball matchups within financials markets this week has been a head-to-head matchup of central banks verse the AI optimism. There were multiple AI-related catalysts today and heading into tomorrow. Broadcom’s investor day seemed to go well, SMCI closed back above it’s secondary offering price of $875 after breaking that level earlier, the Astera Labs IPO also traded well.  Micron earnings after the close look solid with the company pointing to AI related demand. Tomorrow Microsoft has it’s New Era of Work event.
Looking ahead to tomorrow we’ll see if there is any sort of re-think overnight. Global flash PMIs will be released and the Bank of England has its rate decision. Ahead of the US open we’ll see the Philly Fed index and weekly claims. Followed by US flash PMIs, existing home sales and leading indicators before tipoff.

Have a good night!

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