BUZZ-View of the Week: Fed pricing matches Fed dots, now what?
The given information falls under the category of macroeconomic related information. The summary of the information is that market rate expectations for the Federal Open Market Committee (FOMC) are now aligned with the bank's projection of three rate cuts in 2024. The focus now is on what happens next, as a move from three to two cuts will be more challenging. This alignment limits how much yields can rise, but it is not necessarily negative for the dollar. The volatility in the markets remains subdued as investors await more data to determine the direction of inflation.
Mar 1 (Reuters) - The dominating trade of 2024 has been the unwind of the aggressive dovish Fed repricing, which led to both dollar and yields heading higher. As a result, market rate expectations for the FOMC are now aligned with the bank’s 2024 median dot plot projection of three rate cuts, and the focus now is what happens next.
A move from three to two cuts will be a much tougher ask than it had been for markets to move from over six rate cuts to three.
Therefore, while this places a limit to how much yields can rise from here, it is not necessarily a dollar negative given that the same can be applied for other central bank rate pricing, though that perhaps alleviates some downside risks for the yen, which has been a consistent rates trade.
For markets, this keeps volatility subdued as investors hop from one event to the next with Fed officials awaiting more data to determine whether the inflation uptick at the start of the year is the beginning of a re-acceleration or simply a bumpy road down towards 2%. Should it be the former, the base case would likely shift to two rate cuts, pushing both dollar and yields higher.
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Fed pricing vs dots
(Justin McQueen is a Reuters market analyst. The views expressed are his own.)