There is some discussion of the Fed possibly signaling that it might be getting near the end of its rate cutting program, when the results of tomorrow’s FOMC meeting are released at 2:00 and discussed by Chair Powell at 2:30. But I think it may be worth pointing out that such discussion is not really in line with the consensus.
The consensus has the median guess of the fed funds target rate within the SEP rising 25 basis points — relative to the September guesses — for year-ends 2025, 2026 and 2027. And it has the so-called neutral funds rate estimate coming up 1/8 of a percentage point to 3%. These are quite small adjustments relative to where market pricing has gone. (Speaking of which, the forward rate for the end of 2026 has done almost exactly a round trip during the past month, dipping and then recovering to its interim high for this episode.)
An obvious question is how to interpret the gap between forward pricing of the funds rate and what economist guessers expect the FOMC members to write down for the SEP. I would resist the temptation to compare the levels of the market forwards with the levels of the FOMC guesses. Just because the SEP suggests that forward pricing is too high does not mean that even the Fed believes this. This point applies generally, but it applies particularly in the current environment where members of the Fed leadership are implying that they have not incorporated any assumptions regarding changes to fiscal / trade policy and their potential growth and inflation implications. And even away from this, there is obvious inertia in how the Fed guesses rates. Plus, they are not guiding anyway.
So, the news tomorrow will be largely related to how those guesses change, not where they are in level terms. I think that confirmation of the consensus take, that all the dots come up 25 basis points, might be a minor relief, because the risk around those 25 basis point guesses is probably tilted just slightly to the high side. But the more important news will probably come after 2:30, when Powell offers his own spin.
Separately, and just very briefly, because I am a broken record on this. The Fed’s estimates of where the neutral rate might be seldom have any effect at all on what they do in real time. In real time, estimates of the neutral rate fully cancel out of the algebra driving the actual decision. Ockham applies here, and I do believe that the Wall Street Journal is mistaken when they imply neutral is important. The bond market needs an estimate of neutral, obviously. They update that every day. But the Fed’s guess has almost no effect on decision making in real time. And you know what? The consensus obviously implicitly knows this.
Source: Federal Reserve Bloomberg
Market pricing is roughly live.
