After Big Rate Cut, Economic Projections Don't Look That Strong
We could be susceptible to some "good news" in the economy, slowing down the Federal Reserve.
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The Fed went with 50 BPS, which we had as a 60% likelihood in Wednesday morning’s Fed Outlook note.
The initial reaction was a big pop in stocks and bonds, which is already starting to fade. Here are some quick thoughts:
We saw only one dissent, who wanted just 25 BPS cut. That was the first dissent in a long time.
While setting up for 100 BPS by end of year (in line with our thinking), that indicates a 50 BPS cut and a skip, or two 25 BPS cuts (it could have been more dovish than this). The weighted average (as opposed to median) hints at some only wanting 25 BPS more — not as dovish as it could have been.
The Fed is “only” at 3.375% by the end of next year (the market has been pricing in more), but they did keep terminal rate at 2.875% (they could have been more hawkish on that, if they wanted to send a hawkish hike 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 we can take the “dovish 50” BPS cut off the table (which was a low probability).
I suspect Chair Powell might try to do a hawkish 50 BPS cut during the presser (in which case, we should see a reversal of the initial reaction), but I still think some form of a “neutral” 50 BPS cut will be the consensus. This is 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.
At the time of publication, Tchir had no positions in any securities mentioned.
