Fed Dot Plot Better Than Feared

The Fed’s statement and dot plot were both in line with the September release.  The stock and bond markets were up after the release as there were fears in the market, including our own, that the Fed could be significantly more hawkish.  The announcement of $40 billion of short-term treasuries was viewed as bullish by some market participants but are simply a technical adjustment to accommodate year end liquidity demand. 

We continue to forecast that reported inflation declines through 2026 to the 2% range as reported shelter inflation continues to slowly trend toward real time market rates.  In addition, money supply growth remains negative, and oil prices are down significantly.  Money supply and oil prices are the two critical leading indicators of inflation.  Consequently, we are forecasting 3 Federal Funds cuts next year and that the 10-year declines to 3.75%.  The 10-year treasury trades consistently 100bp over the expected Fed Funds terminal rate.   Comments that the 10-year was rising due to concerns that Kevin Hasset’s potential appointment as Fed Chair was causing the 10-year rate rise were completely misguided as the Fed Funds terminal rate was also rising.  If the terminal rate was plummeting to inflationary levels such as 2% and the 10-year rate was rising significantly, that would indicate the market was anticipating an inflation spiral caused by imprudent Fed policy.