The Fed may pushback against easing conditions on Wednesday

Introduction

The FOMC statement is due to be released on Wednesday at 7:00pm GMT. The CME FedWatch Tool suggests an unchanged target rate at 5.25%-5.50%. Inflation is moderating and, although the NFP was higher than anticipated, the labour market does seem to be cooling. These all point at monetary policy being in restrictive territory, aiding in achieving the Fed's 2% inflation target over the coming months. However, the market will be looking at the member forecasts to assess the possibility of the "higher-for-longer" narrative.

125 bps Cut to 100 bps Cut

The CME FedWatch Tool currently has a forecast of a 100 bps in cuts for 2024, slightly lower than its recent suggestion of 125 bps. I.e. the market is aggressively pricing in interest rates cuts next year. This has been accompanied by a decline of around 56 bps in the 10-year real rate since its October high.

Governor Waller recently said that a cooling of inflation "for several more months – I don't know how long that might be – three months, four months, five months – that we feel confident that inflation is really down, and, on its way, you could then start lowering the policy rate just because inflation is lower."

Easy Conditions

However, the drop in the real yield suggests an easing of financial conditions that will likely worry the Federal Reserve. Inflation is still above target, and these looser conditions may skew the Fed to be more conservative in its communication on Wednesday so that conditions do not loosen even further. Therefore, the Fed may signal only 50 bps of cuts in 2024, the same as they signalled in its September forecasts.

On 1 December, Federal Reserve Chairman Jerome Powell suggested that "it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so."

A Dovish Fed

If current conditions are, in fact, restrictive, and data continues to moderate, the Fed will pivot to a more dovish stance. Adding to this is the potential risk of recession in 2024. Many pundits submit that a hard landing is coming, however, this is yet to be confirmed. The central bank, as usual, will be heavily dependent on the incoming data, but until then it is likely that the Fed will push back against the market's expectation of an easing cycle in 2024.