Waiting Anxiously for the Fed’s Projections

The central bank policy narrative is alive and kicking today, but that doesn’t mean market participants are being dragged into the action kicking and screaming.

Currently, the S&P 500 futures are up 16 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 53 points and are trading 0.4% above fair value, and the Dow Jones Industrial Average futures are up 117 points and are trading 0.3% above fair value.

The central bank everyone has eyes on today is the Federal Reserve, but before looking there, we should note that some weaker than expected August CPI data out of the UK has stirred speculation that the Bank of England will hold off on a rate hike at tomorrow’s meeting. 

Separately, the People’s Bank of China entered today’s central bank conversation after it decided to leave the one-year and five-year loan prime rates unchanged, as expected.

Now, for the Federal Reserve it is widely expected to leave the target range for the fed funds rate unchanged at 5.25-5.50%. That decision will be communicated in a policy directive released at 2:00 p.m. ET along with an updated Summary of Economic Projections (SEP) and dot plot.

All of that will be subject to stern analysis (and over-analysis) to divine what it could mean for the timing of future policy rate decisions. In the same vein, market participants will be hanging on every word spoken by Fed Chair Powell at his 2:30 p.m. ET press conference to explain today’s decision and to provide some context for the Fed’s economic and interest rate forecasts.

What Fed Chair Powell says will be just as important as how he says it. Tone matters, as everyone learned during his 2022 Jackson Hole speech.

Keen attention will be paid to the median forecast for the 2024 federal funds rate. The June projection was 4.6%, which was 100 basis points below the median forecast for the 2023 federal funds rate, so participants are going to be anxious to see if the Fed dials back its own rate-cut projections. In turn, the longer-run rate of 2.5% will also be in focus. A higher rate there would be construed by some as an indication that the Fed is loosening the rope on its 2% inflation target.

One can expect some knee-jerk trading reactions amid all of the breaking policy news and projections. That is par for the course on a Fed day, but it is best not to get caught up in the initial reactions.

A point we expect Fed Chair Powell to drive home is that the Fed is going to stay data dependent for its policy decisions; therefore, what is said today could be rendered meaningless in a few weeks or months if incoming data refute what the Fed and Fed Chair Powell say today.

For now, the equity futures market says it will be a modestly higher open for stocks, which are drawing a little inspiration from the pullback in market rates and oil prices. The 2-yr note yield is down six basis points to 5.06%, the 10-yr note yield is down three basis points to 4.34%, and WTI crude futures are down 1.1% to $89.48 per barrel.

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Originally Posted September 30, 2023 – Waiting anxiously for the Fed’s projections