Some thoughts on Fed meeting:
· The members were able to change their dots until late yesterday. If enough did not think their dots was different enough to change, their dots may be slightly higher, AOTBE.
· The 2023 dot may be lower than the terminal rate, because there may be an ease(s) priced into 2023 by the members.
· While the Fed may say something different regarding the number of hikes priced (slower pacing), it seems highly unlikely the Fed will say anything to imply they may ease any time soon – especially when it is acknowledged that getting from 4% to 2% inflation is the difficult part. Quite the opposite, the Fed will probably push back on the eases priced.
· On Nov 28, Williams thought inflation would be 3-3.5% and the UR 4.5-5% in 2023, and he STILL saw no ease in 2023 (presumably from 5% FF), and only "probably" an ease(s) in 2024. So a hurdle for an ease is high.
· This makes the market pricing in almost 100bps of ease more than the Fed’s 2024 dot of 3.9% “aggressive,” when it is not clear: (1) inflation will be cooperative, (2) wages will be cooperative, (3) a recession will be that deep, with economists calling for a 0.4 and 1.4 GDPs for 2023 and 2024, respectively, and (4) the Fed triggering a deep recession with a lower terminal rate.
If I have time, I’ll blog about the any relevant points over the weekend. I may start posting more frequent thoughts via Twitter (@curveadvisor), if you want to follow along.
Happy Trading!