Risk Alert: 3 Letters Today Will Mean Everything

March 20, 2024

3-20-2024

 

Lede

Today the Fed will announce its decision on interest rates, which will be to leave rates unchanged, but along with that decision will be an update to three very important letters: SEP.

Story

The SEP is the Summary of Economic Projections, often times referred to as the “dot plot.”

It is referred to a dot plot because each member of the committee will anonymously place their projections for five items:

  • Real GDP growth rates
  • Unemployment rates
  • Inflation rates, as measured by the PCE price index
  • Core PCE inflation rates (excluding food and energy)
  • Federal funds rate projections

Each member’s projection will be represented by a dot on a plot (a dot plot), and the median will be discussed in the news. The dots reflect what each U.S. central banker thinks will be the appropriate midpoint of the fed funds rate at the end of each calendar year.

The prior SEP medians, which were produced on Dec 13th 2023,  had the following for each of the five items:

  • Real GDP growth rates for 2024: 1.4%
  • Unemployment rates 2024: 4.1%
  • Inflation rates, as measured by the PCE price index 2024: 2.4%
  • Core PCE inflation rates (excluding food and energy): 2.4%
  • Federal funds rate projections: 4.6%

The Fed funds rate median projection implied three 0.25% rate cuts in 2024 from the current 5.375% to 4.6%.

What to Watch

This is the part where I simply estimate (guess) what we could see:

I believe the following will happen:

  • GDP growth rate median projection of 1.4% for 2024 will be higher give the performance in Q1 of 2024.
  • Unemployment rate will remain mostly unchanged and in fact, I have no estimate.
  • PCE and Core PCE may be raised to reflect less disinflation, although I point out that the current PCE is in fact 2.4% so we have reached the projection already. I believe the risk is to Core PCE projections coming in a little higher.
  • The Fed will project a higher year end Fed funds rate which is a fancy way of saying the median projection will call for fewer rate cuts. I believe (guess) that the new median projection for the Fed funds rate will be 4.8% or higher (up from 4.6%).

So, what will the market do?

Well, that comes down to a personal view: does a higher GDP projection override a higher rate projection and possibly slower disinflation?

I don’t know.

A worst case scenario for the market would be lower projections for GDP, or even unchanged projections for GDP, with higher projections for inflation and the Fed funds rate.

But, in all, it doesn’t matter what I think because, as the mantra goes…

… what the Fed thinks about inflation is the only thing that matters.

Conclusion

Here comes the updated SEP and quite likely an abrupt move in the market which often times reverses as abruptly in the other direction once Chairman Powell holds his press release after the data is released.

Thanks for reading, friends.

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