MFS: All eyes will be on the new Fed ‘dots’

MFS: All eyes will be on the new Fed ‘dots’

17 december 2024

Rente Fed
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Erik Weisman, Chief Economist at MFS, looks ahead to the next Fed meeting.

The market is fully priced for the Fed to cut rates by 25 basis points this week. And in this respect, the market will not be disappointed. What will be far more interesting is what the new Fed “dots” tell us about Fed policy expectations for 2025, 2026, and in the long run.

Since the last time that the Fed updated its Summary of Economic Projections, consumer inflation has been stickier than expected and the labor market, notwithstanding temporary weakness in October due to labor strikes and hurricanes, has also been quite resilient.  And therefore, over the last three months, the market has priced the terminal Fed funds policy rate almost 100 basis points higher than in September.

Indeed, back in September the market was pricing for the Fed to cut at every upcoming meeting over the subsequent several months, with a couple of 50 basis point cuts early on.  Fast forward to the December meeting, and not only is the market priced for a much higher terminal rate, it is pricing for cuts to occur less than every other meeting.  So, will Powell suggest that the market has gone too far in expecting a relatively hawkish Fed path, or will the Fed validate the market view?

That is, will the Fed median “dot” show 4 cuts in 2025 as we saw in September, or will the “dots” be dialed back to only 3 cuts next year?  And how many subsequent cuts will the “dots” forecast for 2026?  Additionally, over the last three quarterly meeting, the long-term median “dot,” which is a proxy for the Fed’s view on the neutral nominal policy rate, has crept up from 2.50% to 2.875%.  How much higher will this long-term view rise? 

The market will also be looking for any hints of Fed thinking on potential upcoming Trump 2.0 policies.  Higher tariffs and greater restrictions on immigration would be viewed as inflationary, at least in the short term. Under such a scenario, would the Fed be more likely to try to look through the transitory rise in prices, or to tighten policy to prevent a rebound in inflation and inflationary expectations, while risking a sharp decline in economic activity?  Powell is unlikely to give us much to go on here, as the Fed is not inclined to front run the actual policy implementation.

Finally, we should note that on the eve of the September FOMC meeting, the 10-year US treasury yield marked its low point for the year at roughly 3.60%.  With the having risen 80 bps coming into the December meeting, will the Fed want to be viewed as implementing a hawkish cut that sends yields yet even higher?

Stay tuned.

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