**As seen in Risk In The Week report 12/08/23, subscribe at cablefxm.co.uk/reports
The Federal Reserve will decide on interest rates following the U.S. December inflation print. Back in November, the Fed held its benchmark rate in the 5.25%-5.50% range. The FOMC decision came after a period of rising yields, benchmark rates reached levels not seen in more than a decade. Given the sharp decline in U.S. Treasuries, Fed officials noted there was less of a need for further rate hikes. The statement noted tighter financial and credit conditions were expected to slow down the economy while the Fed needed to assess the extent of additional policy firming. During the presser, Fed Chair Powell said the FOMC is proceeding carefully given the amount of past tightening.
In recent headlines, prominent investor Bill Ackman said he bet the Fed will start cutting rates as soon as 1Q 2024, his expectations compare to Fed swap contracts pricing the first rate cut coming in May. However, a stronger-than-expected labour market report moved swaps to price in less easing for next year. Earlier in the month, Fed Chair Powell said it was premature to speculate on when policy may ease. Also, he said the Fed was ready to tighten policy further if this was appropriate. The December decision will bring a fresh batch of macroeconomic projections, the September release showed the 2024 median dot plot for the Fed Funds Target Rate at 5.125%, and market participants will be attentive to adjustments here as swaps price in about 110bps of rate cuts for next year.
The desk at UBS Securities said that the December projections will likely show no longer rate increases and rate cuts for the years ahead, they identified risks of two rate cuts for 2024 penciled by the dots. UBS said that they expect the median FOMC dot plot to total 250bps of rate cuts over the SEP forecast horizon. Analysts warned that even when we see the start of rate cuts, the Fed is likely to push back on easing expectations saying that they will resume policy tightening if inflation comes back.
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