The Fed pivots

The 2-year U.S. Treasury has fallen a large 30 basis points from the Fed meeting yesterday because the Fed was dovish when they were widely expected to be hawkish but more importantly, because of the “once a business cycle” significance of shifting towards being dovish after a long rate hike cycle; called a “Fed pivot.” This is explained in a Forbes article this way,

“Because the economy follows regular cycles of expansion and contraction, the Fed periodically flips back and forth between tight and loose monetary policy measures. When the central bank transitions from tightening to loosening or vice-versa, market professionals say the Fed is pivoting.”

Three elements from the meeting yesterday indicated this pivot,

1. They downgraded the economy. Jerome Powell said, “Recent indicators suggest that growth of economic activity has slowed substantially from the outsized pace seen in the third quarter.”

2. They indicated they were done raising rates. They added a single word, “any”, to the sentence, “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. Powell explained the addition in the press conference, “So we added the word “any” as an acknowledgement that we believe that we are likely at or near the peak rate for this cycle.”

3. They added another 2024 rate cut+ in their projection materials. The weighted average rate expectation for the end of 2024 fell 34 basis points.

Interest rates have fallen so much because the bond market rushed to price-in more of the next step in the business-cycle sequence; a cutting cycle. The odds of a March rate cut have increased from about 40% before the meeting to now about 80%.