MacroResearchBoard

Fed Policy: Forget About A Goldilocks Outcome – September 25, 2023

A report published last week updated our views on Fed policy and the bond market outlook after last week’s FOMC meeting, and concluded that the Fed has finally started to acknowledge that the policy rate will follow a higher path over the coming years than it has been signaling.

FOMC participants revised up their policy rate expectations for next year, and a few even raised their expectations for the longer-run policy rate. These projections were a hawkish surprise for the bond market (which had been pricing in a quick U-turn to policy rate cuts next year), but were aligned with MRB’s view that the policy rate will follow a much higher-for-longer path this cycle than the Fed and the bond market have been anticipating.

Going forward, we see no room for any rate cuts next year. The Fed is still too complacent on the medium-term inflation outlook: we expect that inflation will surprise the Fed on the upside next year and force another rise in next year’s policy dots. Finally, we expect that that Fed’s median longer-run policy rate forecast will also eventually rise, underlining that the policy rate will remain much higher over the coming years than the Fed or the bond market are currently envisioning. We remain underweight bonds within a multi-asset portfolio, and overweight cash.