US | The Fed will try to push back the recent shift in market expectations

Summary

We expect the FOMC to hold the fed funds rate unchanged at the current 5.25-5.50% target range and to steer clear from fueling speculation about rate cuts in early-2024.

Key points

• Key points:
• A recent significant shift in the yield curve likely reflects investors’ belief that the Fed is done raising rates and growing expectations that rate cuts could start earlier in 2024.
• What drove this shift? It seems that reduced uncertainty on the fed funds rate path next year has been mostly driven by recent encouraging inflation data.
• How will the Fed react to this shift? It will likely attempt not only to signal that the door for rate cuts is unlikely to open soon, but also to retain a tightening bias.
• Yet, it will have to acknowledge that economic activity is slowing, labor market demand is easing, and inflation continues to move in the right direction.
• The focus will be on the updated economic projections (SEP): year-end 2024 and 2025 interest rate projections will likely be revised down by at least 25 bps each.

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