The FOMC Meeting and What it Means For Your Money

FOMC Meeting Analysis and Market Commentary

The Setup

So Kevin Warsh just held his first meeting with the FOMC, equity markets sold off heavily into the close interpreting his updated projections as hawkish. However after truly deep diving into the meeting and running our own projections we believe there may be more than meets the eye to the fed meeting and that the market may have grossly overreacted to Kevin Warsh and the FOMCs projections. So lets dive into it to better understand what occurred at the meeting…

The Policy Decision

The FOMC held the federal funds rate target at 3.5-3.75%, the fourth straight meeting with a change. The market did not react well to the updated dot plot (the chart that records where rates are expected to go) these projections turned moderately hawkish with the median year end estimate rising to ~3.8% from 3.4% in March with more than half of the committee predicting a rate hike rather than a rate cut.

At first glance this does sound unfavorable for a rapidly growing AI sector that will rely heavily on low interest rates to speed up growth, but the most important detail was the one that markets overlooked; the long run “terminal rate” which is theoretical equilibrium rate where economic growth is neither stimulated nor inhibited did not change at all; remaining at 3.1%.

Simply put, the committee raised their expectations for the next 18 months but left the endpoint unchanged. The most reasonable read of this info is that the Fed regard the current inflation pressure as a shock we must ride out rather than a permanent shift.

Market vs Fed Expectations

Now diving into how the market vs the Fed is pricing in the future federal funds rate is where it gets really interesting, a popular claim online that the bond market is pricing in three to four hikes is not supported by the rate curve at all. In reality, the market and the fed actually agree on the short term: both of which are implying at least one rate hike toward that 3.8% figure later this year.

However the market and the fed split midway to the end of 2027, where we see the market pricing in additional rate hikes that the feds official projections do not. (see chart below)

So the base case here is that we get one rate hike later this year with divergence through 2027. However this is not set in stone at all as the Fed could potentially reference an alternative inflation measure that could change the projections entirely…