Focusing on Dots and Thoughts, Not The 0.50% Rate Hike

Abstract

Markets have fully priced that in and multiple Fed speeches-including Powell 2 weeks ago-have all but confirmed that Fed is unanimously onboard with a smaller hike at today's meeting. Today's dot plot remains highly interesting and uncertain due to the proximity of the CPI data and the fact that Fed members submitted their forecasts on Friday, but have the option to revise them after yesterday's CPI. So how may the dots change? In addition to the holiday theme seen in the following chart, the Fed speeches from before the most recent CPI suggest that the 2023 dots should be higher with a median moving up from 4.75 to perhaps 5.0. We remain a bit hesitant to assume these dots fully capture any shift due to CPI. Fed members are human beings, and not all of them may think it's critically important to make a small adjustment to their already-submitted dot due to one friendly inflation report. We see more correlation between the Fed Funds rate and other rates when we're using Fed Funds rate EXPECTATIONS rather than the rate itself. One of the most obvious reasons for this is that expectations can trade essentially all the time whereas the Fed Funds rate will only be updated 8 times a year barring emergencies. Still, even in this chart we can see longer term rates breaking away from the Fed Funds expectations. The rate announcement, statement, and dot plot come out at 2pm ET. Powell's press conference begins at 2:30pm ET..