FOMC Communications Fail To Convince (1/3)

As discussed in our review of the FOMC meeting, the fairly subdued shift in Fed funds hike pricing – which includes a peak ~5.30% that falls well short of the 5.625% end-year median implied by the new Dots – suggests that market participants aren’t fully convinced that the Fed itself has conviction on hiking prospects.

• We think the FOMC would probably be satisfied with the market response overall, with 2023 rate cuts being further priced out (post-meeting implied rates were 5.22% for December, vs 5.10% prior), with a July hike likely but still uncertain.
• One of the reasons for a lack of a more significant market shift is that the hawkish Dots were largely seen as reflective of an increasing divide on the FOMC that the Chair is trying to bridge, rather than a literal roadmap to another 50bp in hikes. A more generous interpretation is that the communications provided increasing optionality for the Fed to maneuver over the coming months.
• We reviewed over 30 sell-side reviews of the meeting, and there is a fairly clear divide growing among analysts: the more hawkish saw their views of further rate hikes this year as vindicated by the FOMC communications, but just as many on the more dovish end saw no further hikes (not even in July as suggested by Powell).
• The common factors are whether analysts take the new Dots seriously, and whether they see the data delivering enough impetus for further tightening.