Often thirty days will pass, and we could pen this monthly missive by simply changing the date; not this time. The FED made clear in their statement, DOTs projections, and Chairman Powell’s presser, that the “top is in”. Moreover, via the DOTs, the FED is anticipating three rate cuts in 2024 with a year-end median projection of 4.63% (see Figure 1).
Figure 1: FED DOT Plot
Source: Federal Reserve
All financial assets rallied with the 10-year rate advancing 27bps in two days. What is most interesting is that interest rate futures are pricing in a 2024 year-end Fed Funds rate of 3.94%. Similarly, the derivatives market is pricing the one-year SOFR rate to decline from 4.89% to 3.50% in twelve months. That’s a 139bps decline, or more than five FED rate cuts of 25bps each. With stocks nearing their all-time high, it seems the market has priced in a perfect “soft landing”, which while historically improbable, may be what is happening.
GLOSSARY:
Basis Points (bps): A common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.
The Secured Overnight Financing Rate (SOFR): A broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
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