The FOMC forecasts were hawkish describing a soft-landing, but the press conference was dovish.

Forecasts (Summary Economic Projections or SEP)

Short-term rates sold off dramatically yesterday afternoon; the 2-year rose 12 basis points. This was largely because the Fed’s average expectation for the Fed Funds rate at the end of 2024 rose 30bps from 4.75% to 5.05% since the last forecast. Normally, the Fed’s forecasts don’t have such a large effect on the bond market, but because their optimism has been more correct than the bond market this year and economic data has been inconclusive; the bond market has given into what the Fed thinks. Rates rose the most surrounding the end of 2024 (see bar chart below). Contrary to several articles written about the meeting, the forecast did not put any greater weight towards raising rates again before the end of this year (see ‘End of 2023’ in table below). The bond market’s probability for another raise before year end is 50% now and it was 44% before the Fed meeting yesterday; not much different.

Press Conference

As an example of the dovish tone to the press conference, Jerome Powell said ‘proceed carefully’, a euphemism for pausing, at least 12 times. Below, I transcribe a telling exchange between Howard Schneider of Reuters (HS) and Jerome Powell (JP) that is Powell’s attempt to explain that the FOMC forecasts are “just playing forward the trends that we’ve been seeing,”

HS: Howard Schneider with Reuters, Thank you. You’ve said several times that the economy needed a period of below trend growth to get inflation consistently back to 2%. You kind of get that in 2024; a little bit. 1.5% is just a touch below what’s the estimate for potential. The fact that you are getting so much done at so much less cost; does that represent a change in how you think inflation works, a change in how you think the economy works, a change in the mix of supply healing versus demand destruction that is necessary to achieve this?

JP: Yes, of course. It is a good thing that we’ve seen now meaningful rebalancing in the labor market without an increase in unemployment and that is because we are seeing that rebalancing in other places. In, for example job openings and in the jobs-worker gap. You are also seeing supply side things. So that’s happening. I would say though; I still think and I think, broadly people still think that we will see some softening in the labor market. That can come through more supply. Also remember the natural rate is coming down, which is a supply side thing. So that the gap between any given unemployment rate that is lower than that and the natural rate. That is a way for the labor market to achieve a better balance. So all of those things are happening. You’re right, in the median forecast, we don’t see a big increase in unemployment. We do see an increase. But that is really just playing forward the trends that we’ve been seeing. That is not guaranteed. There may come a time when unemployment goes up more than that. But that’s really what we’ve been seeing, is progress without higher unemployment for now.

HS: Just to boil that down for a second. You know, we’ve gone from a very narrow path, to a soft landing, to something different (points to new SEP). Would you call the soft landing now a baseline expectation?

JP: No, no, I would not do that. I would just say. What would I say about that? I’ve always thought that the soft landing was a plausible outcome, that there was a path really to a soft landing. I’ve thought that and I’ve said that since we’ve lifted off. It is also possible that the path has narrowed, and it has widened apparently. Ultimately, this may be decided by factors that are outside of our control at the end of the day. But, I do think it is possible. I also think this is why we are in a position to move carefully again. We will restore price stability. We know that we have to do that. We know that the public depends on us doing that. We know that we have to do it so that we can achieve the kind of labor market that we all want to achieve which is a sustained period of labor market conditions that benefit all. We know that. The fact that we have come this far lets us really proceed carefully as I keep saying. That is the end we are trying to achieve. I wouldn’t want to handicap the likelihood of it though. It’s not up to me to do that. Between the hawkish forecasts and Powell trying to suggest they aren’t that useful, there wasn’t a glaring new signal for the direction of yields yesterday. I suspect it was Powell’s goal to not give one. Yet, the bond market ignored Powell and ran with the extrapolated soft-landing forecasts; for now. The soft-landing concept is just a placeholder until economic data becomes clearer to the downside.