Mid-Week Update
FOMC minutes didn’t reveal much new to consider. They are also stale, as the release of the minutes takes place three weeks after the meeting, where quite a few things can change. This time is no different as the Fed’s concerns around tightening financial conditions clearly have flipped around as bonds and risk markets have rebounded.
The key for the Fed and markets will be how long they will be holding the rates plateau and what conditions would need to change in order for the dial to be taken down a notch. In my piece on “inverse optimal control policy”, I opined how, when looking at Taylor rules, a drop back down to 2% in inflation would only justify a Fed Funds rate of 4%, which isn’t miles away from where markets are pricing Year-end rates for 2024.
The market has a first full cut of 25 bps priced for June 2024. That’s not unreasonable, but cutting cycles never pan out linearly. More on this in a separate post.
Let’s now look at what the systems are flagging as of the close of business on Tuesday.