The Fed near the top of a wave
The Fed was hawkish today causing the 2-year to rise 13 basis points, but this tone and economic projections are entirely based on the “mini-boom” that’s occurred since August which is not durable. Powell made this distinction in an answer to a question about the Summary of Economic Projections showing just two cuts next year, “I think the actual cuts we make next year will not be because of anything we wrote down today. We are going to react to data, it is just the general sense of what the committee thinks is likely to be appropriate.”
Economic data has improved materially since August causing rates to rise and the Fed to become more hawkish (see chart below.) The Fed meeting today is essentially the caboose of this story, just confirming what the data has already done. Economic data hasn’t improved for a month now (see purple oval in chart below), and so this “boom” concept will need more exceptional economic data for rates to keep rising. The bond market is projecting for Fed funds to fall just another 3/8ths of a point in this cycle, to 4% now, which is far too little for the Fed to get back to neutral, which they estimated today to be 3.0% (from 2.9%). The 2-year yield doesn’t have much room to rise further, it is already cheap to the Fed’s median expectation to lower rates twice more next year.
With the economy being fiscally-suspended at the top of this business-cycle, the pattern in economic data has been that weaker economic data causes rates to fall which stimulates the economy enough to create a temporarily better economy, hawkish Fed, and higher rates. The higher rates then constrict the economy and the cycle repeats. Each peak in rates has been lower than the one before as the primary trend of the nominal economy slowly weakens. This pattern will continue with another leg down shortly.

From the cyclical peak in rates last October, these waves have lasted between 2 and 4 months and with the current wave at 4 months, it is looking tired. Stock markets are beginning to look wobbly; the Brazilian Bovespa is down 12% from its peak, the equal-weighted S&P 500 is down 7%. Be ready for economic data to start weakening again, rates to fall, and for rate cuts to be priced back in. The Fed will presumably cut to at least 3% in this cycle (around neutral), but with the labor market continuing to deteriorate, a recession looks set to start in Q2 of next year which will send rates much further down.

Take today’s “economic projections” and hawkish tone with a grain of salt, they are just a “mark-to-market” of conditions near to the top of an economic data wave.