Quick Thoughts – Post SEP/DOTS & Statement

The Fed went with 50 bps, which we had as 60% likely in this morning’s Fed Outlook note.

Initial reaction was a big pop in stocks and bonds, which is already starting to fade.

• 1 dissent, who only wanted 25. First dissent in a long time!
• While setting up for 100 bps by the end of the year (in line with our thinking), that indicates 50 and a skip, or two 25s (could have been more dovish than this). The weighted average (as opposed to median) hints that some only want 25 more. Not as dovish as it could have been.
• The Fed is “only” at 3.375% by the end of next year (market has been pricing in more), but they did keep the terminal rate at 2.875% (they could have been more hawkish on that if they wanted to send a hawkish cut signal).

The economic projections don’t look that strong, which might leave us susceptible to “good news” in the economy slowing down the Fed.

Given the statement and the dot plot, I think that we can take the “dovish 50” off the table (was low probability).

I suspect that Powell might try to do a hawkish 50 during the presser (in which case, we should see a reversal of the initial reaction), but I still think some form of “neutral” 50 will be the consensus. Not bad for stocks or bonds, but it may not hold if the market is as bullishly positioned as I think it is coming into this.

Quick Thoughts – Post Press Conference

Very “balanced.” My take is that the “path” they laid out is very dependent on inflation getting below 2.5% and closing in on 2% (he still uses 2%, but I think he means 2.5%). I think inflation is heading lower, but we are open to months of upward surprises.

On the jobs front, we have argued that they are making several mistakes, including seasonal adjustments. They seem to be trying to fix things like the birth/death model. On “seasonals,” it adds too many jobs in Jan – April and takes too many away from June – Sept (geographic demographic shift and includes data during COVID closing and re-opening). We almost need jobs to deteriorate to keep them on their projections and we are about due for some upside surprises.

If we aren’t getting below 3% until the end of 2026, then we are pricing in too many cuts too quickly. I also think that the 3% will ramp up over time (which has been the trend).

All in all, I think this is as close to a “Hawkish 50” as we could get. Maybe close to a “neutral 50” but I give Powell credit for not turning too dovish during the press conference.

Expect selling in stocks and bonds, partly on Fed disappointment, but primarily because positioning became too extreme versus what was delivered.

For now, 50 bps more this year seems like a certainty, and it is probably harder to get to “only 25” rather than 75, but I’m not sure that is a zero probability given the preponderance of information we were delivered today.

If the Fed speakers in the coming days steer towards neutral, we can rally across the board, but we haven’t seen that yet.

Finally, tune in to Bloomberg TV bright and early tomorrow at 6am ET to get Academy’s thoughts going forward, having had time to digest everything in more detail!

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