Why is it said that the Fed’s doves hide hawks at the December FOMC meeting?
Pigeons
➤The intimidating eagle
From June to September 2023, the high-density expectation of the dot plot is always that the terminal interest rate is between 5.25 and 5.5%. This has caused the market to fail to completely shake off the tragic expectation of another interest rate hike since August.
In the September 2023 dot plot, officials predicted that the probability of another interest rate increase in 2023 was 63%. Among 19 officials, 12 people believed that another interest rate increase was needed. As a result, the Fed will never raise interest rates again after September 2023...
The Federal Reserve is like this, looking hawkish throughout the fourth quarter of 2023...
The reason why the Federal Reserve has adopted such a scary posture is that Little Bee speculates that the strategic direction in 2023 is hawking. This strategic plan may have determined the future cycle of water collection and hawking as early as the release of water in 2020.
On the other hand, in the face of higher inflation, the Federal Reserve releases hawkish signals to influence market sentiment and guide the behavior of market entities. Faced with the hawkish tone, companies tend to cut prices, workers tend to lower wage demands, consumers tend to reduce consumption, and crude oil prices tend to fall, thus allowing the inflation rate to be better controlled.
➤Turn pigeon
Finally, in December 2023, the trend shifted from interest rate hikes to interest rate cuts, letting the market feel the dovish atmosphere.
Similar to the previous analysis, it took more than a year from the first interest rate cut in 2022 to 2023. During this time, the Fed's main strategic goal was to suppress inflation. After entering 2023, while suppressing inflation, the Federal Reserve must take suppressing economic recession as one of its strategic goals, so its attitude and tone have changed from hawk to dove.
First, the 2024 interest rate forecast range has fallen relative to September's dot plot. This means interest rates in 2024 will be looser than originally expected.
Second, in the opening remarks of the press conference, Federal Reserve Chairman Powell affirmed that "the unemployment rate will remain low" and "inflation has eased in the past year" in 2023, and set the inflation rate of 2% as a longer-term goal (2026) .
Third, although Powell said that he would not rule out further interest rate increases, he believed that interest rates may have reached or are close to their peak. Although he said that "it is too early to declare victory against inflation," the Fed meeting has begun to discuss the timing of interest rate cuts.
Tibetan eagle in the pigeon 中
Although the Fed's attitude and dot plot are reversed compared to September 2023, there may still be hawks among the doves.
➤Compared to June 2023 forecast
image
Comparing the dot plots of June, September, and December 2023, for the interest rate forecast in 2024, the December forecast is indeed lower than the September forecast, but still higher than the June forecast. Therefore, the so-called dove is just a prediction relative to September 2023, and the prediction relative to June 2023 may be hawkish.
➤Compared to market expectations
CME Group’s interest rate futures show that the market is predicting a rate cut in March 2024.
image
However, according to each interest rate cut of 25 basis points, there will be no pause in continuous interest rate cuts. This dot plot shows that the highest probability of an interest rate cut will be in September, and the earliest interest rate cut prediction is also in May 2024.
image
Among the 19 Fed officials who participated in the forecast, only one predicted that the interest rate at the end of the year would be 3.75~4.00% (interest rate cuts will begin in May). No one predicts that interest rates will be between 4.00 and 4.05 at the end of 2024 (rate cuts will begin in June). Therefore, the probability of a rate cut in May is very low. There is no interest rate meeting in July, and the prediction of interest rate cuts starting in August is lower than that in October.
The Fed dot plot predictions will differ from actual conditions, but not by much. Therefore, the probability of a rate cut in March is extremely low. This is very different from market expectations. After 19 Fed officials predicted in December, the possibility of a sudden interest rate cut in March that has nothing to do with the forecast is probably unlikely.
Of course, it is also possible to cut interest rates in March and then suspend the rate cuts in the middle. However, the probability of suspending interest rate policy in the initial stage is probably not high.
Therefore, market expectations for interest rate cuts may be too optimistic.
➤Balance shrinkage is still continuing
Federal Reserve Chairman Powell's opening remarks at the press conference were, "We have decided to keep policy rates unchanged," followed by "and continue to reduce our securities holdings." When the Fed releases money, it releases dollars into the market by purchasing securities. Therefore, although it stopped raising interest rates, the Fed continued to shrink its balance sheet by reducing its holdings of securities and withdrawing U.S. dollars.
➤Interest rate comparison
In his opening remarks at the press conference, Federal Reserve Chairman Powell stated, “The appropriate level of the federal funds rate will be 4.6% by the end of 2024 and 3.0% by the end of 2025.6% and will be 2.9% by the end of 2026."
What is the concept of this interest rate?
February 2014, Oxtail, interest rate 0.07%,
In January 2015, during the bear market, the interest rate was 0.12%.
In January 2018, Oxtail, the interest rate was 1.42%,
Before the interest rate cut in the first half of 2019, the interest rate was 2.4%.
In January 2021, Oxtail, the interest rate was 0.08%.
Therefore, in 2024, when the economy is approaching or may have already declined, the interest rate will be 4.6%, in 2025, the interest rate will be 3.6%, and in 2026, the interest rate will be 2.9%. If interest rates really drop by this much, what do you think will happen to the easing of funds in the speculative market?
Of course, this expectation is still far away, and the actual situation may vary greatly. 2025-2026 is still far away. However, the short-term emotional impact of the switch from hawk to dove may have relatively limited benefits for 2024.
