Fourth FED meeting in 2024

Recently, the FRS held its fourth meeting of the year. The regulator's current stance on monetary policy is aimed at maintaining a restrictive stance:

• The rate is kept in the range of 5.25-5.50% (holding at the current level from July 2023);
• The Committee intends to continue to reduce securities holdings (Treasuries $25 billion/month and mortgage-backed securities $35 billion/month).

Economic Highlights:

• The Committee sees progress in slowing inflation, albeit with some moderation, and expects further gradual declines over the longer term;
• The labor market is gradually cooling from its overheated state. Several indicators suggest that labor market conditions have returned to about where they were two years ago. However, there are discrepancies across labor market surveys, making reconciliation difficult, underscoring the importance of looking at longer-term trends;
• Consumer spending is still rising, albeit slower than before. The Committee is monitoring these indicators closely but currently considers the household sector to be relatively strong;
• The banking system remains strong and well-capitalized, and current interest rate policy does not raise immediate concerns about financial stability.

These findings suggest that the Committee sees a sustained expansion in economic activity. The forecasts have been adjusted accordingly:

• Raised the inflation forecast by 0.2% for consumer spending (PCE index) to 2.6% for 2024. Powell attributed this increase at the press conference to using a more conservative estimation approach;
• Raised the interest rate (EFFR) forecast to 5.1% for 2024 and 4.1% for 2025;
• GDP and unemployment rate projections for 2024 remained unchanged:

Commentary

Overall, the general background of the Fed Chair's rhetoric was moderately restrictive. The key message is consistent with all previous speeches: future decisions will be based on incoming data and the overall economic situation (no strategic plan). On the one hand, the committee does not expect that it is appropriate to lower the target range for the rate until it is more confident that inflation is steadily approaching 2%.

On the other hand, there was a hint: a weakening labor market provides a reason to cut rates. Powell said, “Unexpected weakening in the labor market, such as a higher-than-forecast unemployment rate or negative payrolls, could trigger an earlier rate cut.”

Despite the Fed forecasting only one interest rate cut this year, market sentiment improved on the back of yesterday's CPI release, which shows inflation slowing further: Market (FedWatch) after the meeting lays out two 0.25% rate cuts for December 2024:

Рынок (FedWatch) после заседания объявляет о двух понижениях ставки на 0,25% в декабре 2024 года:

Stock Market:

• The SP500 index opened today with a gap up to 1.12%;
• Nasdaq 100: +2.10%;
• Russel 2000 (small-cap companies): +1,30%;
• DX Dollar Index: -0.35%;
• VIX, RVX and MOVE volatility indices: unchanged;

U.S. Treasuries:

• Overall, the reaction is positive, with yields falling across almost the entire curve:

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