The tone has changed......

In the early morning of December 14, the results of the Federal Reserve's interest rate meeting came out:

Maintain the federal funds target rate in the range of 5.25%-5.50%, and reduce the number of Treasury bonds by $60 billion and $35 billion of MBS per month.

In line with market expectations.

It can be said that regarding the Fed's interest rate hike, since the end of the July interest rate meeting, the Fed has basically confirmed market expectations step by step.

The chart below shows the market's interest rate expectations for the Fed as shown by CME interest rate futures so far in 2023, and it is clear that keeping the rate unchanged at 5.25-5.5% has always been the direction of the market bet since the July 2023 rate hike.

Source: CME

After this interest rate meeting, the market's probability that the Fed will continue to raise interest rates in the future has been reduced to 0, but the expectation of interest rate cuts has begun to be considered by the market, and CME's interest rate futures bet that the Fed will cut interest rates for the first time at the March 2024 interest rate meeting, with a probability of nearly 75%.

Source: CME

Let's take a look at the Fed's interest rate dot plot and Summary of Economic Projections (SEP).

The dot plot represents the Fed members' expectations for the future US federal funds rate, but I've been saying that most of the time, the dot plot is like a fart and doesn't make much sense, and this time it's certainly the same.

The interest rate dot plot at this meeting, if compared with the interest rate dot plot in September, the overall water level has dropped a lot - which means that no matter what hawks or doves, the vast majority of the voters are grass.

Three months ago, even the most dovish Fed officials only expected the Fed to cut interest rates to 4.25%-4.5% in 2024, while as many as 10 officials expected Fed rates to remain above 5% by the end of 2024;

Now, only three months later, only three officials believe that the Fed's interest rate will remain above 5% in 2024, and the remaining 16 voters all believe that it will fall below 5%, and some officials even believe that the rate should be cut below 4% by the end of 2024.

All things considered, the Fed's interest rate forecast for 2024 was 5.1% in September, and now, with little change in the fundamentals of the U.S. economy, it has fallen sharply to 4.6% in three months - I don't know how the farting voters predict the interest rate they set?

In short, the Fed's interest rate dot plot is far less meaningful than the interest rate probability shown by CME interest rate futures - after all, CME interest rate futures are played by investors with real money.

The latest economic forecasts are summarized below.

To put it simply:

The economic growth forecast for this year has been revised upward to 2.6% and downward to 1.4% in 2024;

The year-on-year PCE forecast for this year was revised down to 2.8% and 2.4% in 2024;

The unemployment rate forecast remains unchanged.

Not to mention the Fed's judgment in September, you can really understand how quickly the Fed's face has changed compared to Powell's speech at the Fed's interest rate decision in November (the dot plot and economic forecast summary will only be available at the quarterly interest rate meeting).

Obviously, in his speech at this interest rate meeting, Powell eased his tone for the first time since 2022, no longer strongly indicating that economic growth is strong, but changed it to "slowdown", and no longer insisted that "inflation remains high", but changed to "ease", and Powell even said frankly that the policy rate "may have reached or is close to the peak of this tightening cycle".

Powell also has a lot of softening words, for example, every time he used to warn the market in a stern manner, it is far from the time to consider a rate cut, and we have not considered cutting interest rates at all, this time, not only admitting that there will be a rate cut next year, but also promising that we will not wait until inflation falls below 2% to start cutting interest rates.

This means that even if inflation is not met, interest rates will be cut......

It's only been 1 month!

The Fed with thick eyebrows and big eyes, it has only been 1 month before and after, why did you betray your previous judgment so quickly? Chameleon!

The Fed has always declared that it is focused on a dual objective: inflation and employment.

But in fact, from November to now, these two indicators have not changed at all, especially the unemployment rate has fallen, logically speaking, the Fed should raise interest rates, and the Fed has changed its face so much in one month.

In terms of inflation indicators, the sharp drop in crude oil prices in November, coupled with the fact that inflation was at its highest level in the same period last year, may be the core factor for the recent expected decline in inflation in the United States.

Source: Federal Reserve, U.S. Bureau of Labor Statistics

For a long time, the Federal Reserve's monetary policy has a typical feature:

When the pigeon is more pigeon than the market imagines;

When it comes to eagles, it is more hawkish than the market imagines.

Eventually, the Fed will be more dovish.

All in all, this interest rate meeting means a complete reversal of the narrative framework from the Fed to the entire market:

From a tight narrative to a loose narrative.

However, the current market expectations are even wilder than the wildest targets predicted by the Fed.

Since October, both the 2-year and 10-year yields have fallen rapidly, with the 2-year yield down 80 basis points and the 10-year yield down more than 100 basis points.

Based on 2-year Treasury yield estimates, the market expects the Fed to cut interest rates five times next year.

Source: Federal Reserve, Choice

The problem is that –

If inflation remains resilient and does not fall below 3% as quickly as the Fed expects;

If the unemployment rate remains low instead of rising modestly as the market expects.

At this time, the Federal Reserve will most likely knock on the market again, and in this case, there is still a considerable probability that the yield of U.S. medium and long-term Treasury bonds will rebound slightly.

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