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Fewer Cuts Rather Than More Hikes

September 20, 2023

The Fed didn’t hike, but the median SEP forecast still has a hike on November 1. Powell said twice, “The SEP is not a plan”, I think reminding everyone to not put too much weight into them.

The markets aren’t totally buying another hike, either. Odds of a hike at that meeting at just 31%. I don’t think they hike November 1, but they are keeping that option on the table just in case the data doesn’t cooperate.

In any event, I’m not sure it matters because who really cares about one more hike or not at this point?

The 10T really hasn’t flinched, still bumping up against that key technical level of 4.35%.

The 2T is up 7bps, the highest since 2006. But really, there were only 6 days in 2006 higher than these levels. You have to go back to 2000 to find any reasonable amount of time with the 2T above its current level. That is absolutely brutal for caps.

The biggest SEP takeaways:

  • Soft landing is guaranteed if you believe Fed forecasts
  • Inflation doesn’t get to 2% until 2026
  • Two fewer cuts in 2024
  • Two fewer cuts in 2025
  • The hurdle to cuts next year will be high
  • The long term Fed Funds is closer to 3% than to 2.50%

Powell kept hammering home that the economy is doing better. The Fed sees no recession until 2027 and their forecasts fly in the face of all economic models. One CNBC commentator called it, “Goldilocks forever.” They have unemployment only increasing to 4.1% while inflation will come down nicely and GPD will expand. Everything is fine.

Powell’s biggest comments:

  • Real rates are meaningfully positive and need to stay there for a while
  • The full effect of the tightening has yet to be felt
  • “It may be that the neutral rate has risen and it’s certainly plausible that the neutral rate is higher than the longer run rate.” Ummm…this could imply a higher inflation target.
  • He said, “In light of how far we’ve come…” twice. I wonder if he’s setting the stage for, “Hey, just because we didn’t hike doesn’t mean we aren’t tightening financial conditions.”
  • He mentioned QT several times, more than I can remember at prior Q&As. I wonder if he’s setting the stage for, “Hey, even though we’re done hiking don’t forget QT substitutes for hikes”

Those last few comments make it feel like the end of the hiking cycle.