Hello, my friends. Today is December 13th, and this is my December FOMC debrief. So we just had the December FOMC meeting, and in my view, it was the most important meeting this entire year, because one, it was unambiguously dovish and two, it signaled a fed pivot. Now, this should not be a surprise to you. After all, I warned you about this in my Saturday weekly markets video and even went on cable news and told you about it yesterday. But before we dive into what happened at the meeting today, let's level set a little bit.
So the last fed meeting, Cher Paul, was pondering whether or not rates were sufficiently restrictive. He knew that he had high grades a lot, he knew that rates were slowing the economy down, but he didn't know if it was high enough. So that's what he was thinking. But between then and now, a lot of things happened. First, the inflation data we've gotten has been very encouraging. Inflation has been coming down at a faster than expected rates. Also, we got some very important fed speak. So Governor Waller, who has been doing a good job and has been a noted hawk, expressed openness to cutting interest rates because inflation had come down, not because the economy is in any trouble, but simply to reflect that inflation has come down. So we would cut rates a little bit so that interest rates would not be too restrictive so that we wouldn't over tighten.
So the last fed meeting, the markets were pricing in basically higher for longer, no break cuts until maybe the second half of next year. And between then and today, the market has basically did a huge shift in its price and went into this fed meeting aggressively pricing in a lot of fed cuts as many as five. So this fed meeting being a December meeting was also special and that we got quarterly dot plots. The dot plot is basically the Fed's way of communicating how different people on the FOMC are thinking. So the dot plot gap, so every FOMC member basically expresses in the dot plot where they think inflation, unemployment, and the interest rate policy would be in the coming years. And when you look at the dot plot, you can get a sense as to what the committee as a whole is thinking people usually focus on the median. The last time we got a dot plot was in September. And at that point, the medium dot plot was showing that we would have two rate, huck rate cuts next year in 2024. So there was a lot of interest going into today's meeting as to what the December dot plots was show. Would it show a big shift?
Okay, finally, we're caught up and now let's talk about what actually happened today. Let's start with the dot plots. So the dot plots were unambiguously dovish. There are dovish in a couple ways. First, of course, noting that inflation has been coming down faster than expected. It seems like a lot of people on the FOMC adjusted their rate cut expectations. Last time in September, the median expectation was two cuts next year. Now December dot plot is showing three cuts next year. So again, that is a lot more dovish than it was the last meeting. Now, the second thing that I thought was noteworthy about this, the dot plot was that the committee seems to have slightly changed its view on our star. So our star basically is where the Fed thinks the long term long term interest rates will be. It has to do with review on the structure of the US economy. Over the past couple years, we've had significant inflation. And even though we raised rates, it didn't seem to go away. And so there was kind of an increasing number of people on the FOMC that were thinking that maybe something structurally changed in the economy, such that in order to get a 2% inflation, we're going to have to keep rates structurally higher. So that is to say, the long run neutral rate for the federal funds rate for the Fed's policy rate was would be higher going forward than in the past. And in this stop plot, it seems that those people change their mind and began to think that, you know what, maybe the future will be like the past. Maybe the neutral rate has not changed. So those two are unambiguously dovish changes from the last meeting. And you saw that reflected immediately in markets.
So at the release of that statement and during the press conference, you saw a tremendous rally in the bond market. People were pricing in more and more Fed cuts. Now to be clear, the price in a ton of Fed cuts heading into the meeting, but the market has a habit of getting carried away. So if you noticed in the past couple years, when Chair Powell was telling everyone that he'd be higher for longer, well, the market was really thinking that he said was, I'm going to cut rates really soon, which of course was not what he said. Now finally, when we're at the pivot point, the market, which was already pricing in a ton of cuts, was pricing in even more. So that's just how the market reacts.
Okay, so that's the first thing that was noteworthy to me. The second thing was during the press conference, Chair Powell basically, all but acknowledged that the pivot is in. So remember, last meeting, he was talking about whether or not rates were sufficiently restrictive. And now he he's coming, he's basically acknowledging that basically everyone on the FOMC thinks that rates are high enough. And the next path next move would be a cut.
Now he's not going to come out and say that he's going to say that, you know, if things change, we're still open to cutting. We're still open the hiking rates. But it's pretty clear from his language, which we'll hear now how to raise the policy rate. And that's really the question that we're still on here. We're very focused on that.
As I mentioned, people generally think that we're at or near that and think it's not likely that we will hike, although they don't take that possibility off the table.
So that, and also the dot plot, that, you know, the pivot is here that rates are as high as they'll be. And the next move is a cut.
所以,还有点图,就是说,你知道,关键在于汇率目前已经达到了最高水平。下一步将是降息。
Now, the third thing that I thought was noteworthy in the, in the presser was that the Fed is open to continuing quantitative tightening. That is to say shrinking their balance sheet, even after they cut rates. Now, traditionally, the Fed doesn't do that.
Traditionally, they think of, let's say, cutting rates and, let's say cutting rates and doing QT would not work makes sense, because on the one hand, you are making policy more accommodative by cutting rates. And on the other hand, you are making policy tighter by doing QT.
You don't want to step on the gas in the brakes at the same time. It doesn't make sense. Now, that's Fed tradition. But today, though, policy seems pretty open to the idea that we could continue to let the balance should run off, even after we cut rates, because he's viewing, he's interpreting it in a different way.
That's a question of, can you continue with QT at such time, QT, which is a tightening action, at such time as policy still tight? And the answer is, it depends on the reason. You know, if you're cutting rates because you're going back to normal, that's one thing. If you're cutting them because the economy is really weak. So you can imagine, you have to know what the reason is to know whether it would be appropriate to do those two things at the same time.
He's thinking that if we cut rates because inflation is coming down, not because we're trying to change the stance of monetary policy, not because we're trying to ease monetary conditions because the economy is weakening, then it's okay to continue to do QT. And that's what I expect them to continue to do.
After all, we have a lot more stability in the bond market now, and they seem to be willing to really wanting to shrink the balance sheet to, I guess, to be smaller than it is. They think that it's grown too much and then focus on changing policy through the overnight interest rate rather than the balance sheet.
Now, just to this aside, another observation that I made was, my sense throughout this was a bit of an awkward conference. It was awkward because my sense was that Paul was actually probably the most hawkish person on the committee, but he was just completely completely overwhelmed by the other members who were very dovish. And so he had to relook and recede to their views and to the data that is showing progress on inflation.
So my sense is that he didn't really like to see the tremendous, tremendous amounts of easing that was getting priced into the markets, the tremendous rally in the bond market and the stock market, but also he had to acknowledge where the other committee members were and what the data is. But we'll see how that plays out.
Going forward, I think that this is probably going to be very positive for all assets. Remember, not the fettest cutting deficit spending is continuing. I think there is tremendous upside risk in all assets from equities, housing and so forth.
So it seems like we're going into the crash up scenario that I wrote about a couple weeks ago, and it's going to be exciting. All right, so I'll be back on Saturday to give you my weekly markets video. All right, talk to you guys soon.