Wall Street Is a Haven for Doves

Wall Street has not let go of its conviction that the Federal Reserve will cut interest rates next year.

When Federal Reserve officials met last month, their Summary of Economic Projections showed a median expectation for the target rate to be 5.6 percent at the end of this year. That’s the equivalent of one more quarter-point hike above the current range of 5.25 to 5.50 percent. The median expectation for the end of 2024 was for 5.1 percent, which would be a quarter point below the current level or two quarter point cuts from the projection for the end of this year.

CNBC on Tuesday released the results of its survey of economists, strategists, and analysts. It shows that 57 percent expect a cut next year but not until September. That would leave room for three cuts, one each at the September, November, and December meetings.

That’s a change from the September survey, which showed that respondents were expecting a cut near the beginning of next year. So, there has been some movement away from the idea that the Fed would start cutting rates less than a year after the July increase, which many on Wall Street are now assuming was the last hike.

There’s still a sizable gap between the median projection of Fed officials and the responses in the CNBC survey. According to CNBC, the survey now forecasts a 4.6 percent federal funds rate at the end of 2024, 50 basis points lower than the September median projection of Fed officials. This seems to imply no more hikes this year and three cuts next year.

That’s also a big shift in a hawkish direction from the June CNBC survey, which showed the funds rate forecast at 3.8 percent.

The futures market is not that far off the CNBC survey, although it may be a bit more dovish. It currently has around a 30 percent chance that the Fed hikes one more time. It has around 50 percent chance that the Fed will ease by the June meeting, assuming no additional hikes this year.

The futures market implies a nearly 70 percent chance of a lower funds rate coming out of the July meeting, an 82 percent chance of a lower rate at the September meeting, an 89 percent chance of a lower rate at the November meeting, and a 94 percent chance of a lower rate by the December meeting.

Dots and Tendencies: The September Story

The projections showed that the so-called “central tendency” of projections of Fed officials ranged from 5.4 percent (implying no additional hikes) to 5.6 percent (one more hike) for this year. The central tendency figure is a range that trims off the three highest and the three lowest projections. As might be expected for end-of-year projections made half way through September, trimming does not actually do anything because the full range of projections was exactly the same 5.4 to 5.6 percent. This implies a pretty strong consensus that there was perhaps one more hike left.

The Fed also releases what’s known as the “dot plot.” This shows each of the projections of officials as anonymous blue dots. In the September projections, there were seven dots projecting no more hikes and 12 dots at the one more hike projection.

One way of looking at that is that the market is now more convinced than the Fed was back in September that there are no more hikes coming. To put it slightly differently, the market has seen the economic data and heard the remarks of Fed officials over the past month and a half since the last meeting and decided that the weight of the information is against another hike.

The Fed Has a Wider Range of Views About Next Year

So, what about next year? As noted above, the median forecast in the projections was for 5.1 percent at the end of 2024, while the CNBC forecast implies a 4.6 percent funds rate. The survey is at the bottom of the central tendency range of 4.6 percent to 5.4 percent.

There was a much wider dispersion of projections about next year among Fed officials. The bottom of the range was for a funds rate of 4.4 percent, and the top of the range was 6.1 percent. The dot plot shows one blue dot for the 6.1 percent projection, one for 5.6 percent, and four for 5.4 percent. There are another four for 5.1 percent and four for 4.8 percent. There were three dots for 4.6 percent and two for 4.3 percent.

This implies that the current market view of next year’s funds rate is lined up with what was a pretty small minority of Fed officials at the September meeting. The market, in other words, appears much more dovish than the Fed was at the last meeting.

It’s very hard to see how that level of dovishness is justifiable given the upside surprises in the economic data in recent weeks. Here’s a list of data that has come in since the Fed’s September meeting:

Given all that, it is extraordinary that the view of markets and analysts is that the most dovish members of the FOMC at September’s meeting will turn out to be right.