In the Old Days…

Today would have been easy in the old days, where we got a summary of projections (aka “the dot plot”) and no press conference.

The bond market (and stocks) both interpreted the “unchanged” in median for dots for 2024 as a sign that the Fed was committed to 3 cuts.

Two things immediately popped out to me:

1. The average went from 4.7% to 4.81% as the distribution changed dramatically. Only 1 person thought there should be 4 cuts, as opposed to December when 5 thought there should be more than 3 cuts (including one member who had 6 cuts).
2. In 2025, the median priced out one less cut and the average moved 17 bps higher. Not the end of the world, but closer to higher for longer than a quick easing cycle.

Under normal circumstances, we would have said to fade the initial reaction, but nowadays, it all comes down to the presser, which is where all the “fun” is.

Balance Sheet Reduction

The Fed admitted they are getting closer to slowing the pace of quantitative tightening (QT). This makes sense, as I’m told there is a limit to how small their balance sheet can get (due to bank reserves, I believe). So, it shouldn’t be a surprise and sounds like something that we might get more information about at the next meeting. It would, in my opinion, be easier “politically” to shrink QT into the election, rather than cut rates.

This should be a positive for risk assets and yields, though balance sheet run-off seems to have been less impactful than large-scale asset purchases, where they bought duration and had a far bigger impact than just letting debt mature and not buying more.

Lags and Belief in Inflation Being Under Control

The cutting argument now seems to largely be based on the belief/hope that inflation is coming down and will continue to come down, despite some recent higher than expected prints. They are definitely worried that if they don’t cut now, they might be behind the curve. The case to cut seems more about lag time and the risk of moving too late, rather than a strong conviction that things are under control (different tone than the December meeting).

What Now

As the press conference finishes, we’ve moved up our timing of cuts (June almost certain) and back to more than 3 cuts this year. The former makes sense, the latter less so.

The 30-year bond has a slightly higher yield on the day (and seemed to move in the “right” direction) given all the noise and comments.

The dollar is down (not hawkish Fed), but Bitcoin and stocks are higher! Stocks seem to like the discussion about QT and rate cuts (though since they are “long-duration assets,” not sure why they are so responsive).

Another day of watching some market leaders trade somewhere in between meme stocks and ARKK, circa 2021.

Maybe this was the “all-clear” we needed to take the Nasdaq 100 to new highs? Except, we are kind of left “more data dependent” than it felt back in December.

I expect bond yields, which “survived” the potentially very dovish Fed, to resume their march higher (led by 10s and longer).

Maybe I’m being stubborn, but stocks seem to be behaving like “stonks” again, but not sure what pushes them out of what has become a range, while I can still see many things leading to a sharp, rapid pullback.

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