The FOMC statement will be scrutinized as usual and so will the press conference from Powell but the market isn't expecting the Fed President to validate the 114 basis points of cuts priced into the Fed funds curve.
After all, it was only back in September that the median Fed dot indicated another rate hike this year. It was something the market consistently doubted and here we are at year-end with virtually no chance of a hike today.
So why should we really care about the December 2024 dot when the market knows far more than the Fed?
The direction of the move will show how inclined the Fed is to cut rates, though I'd certainly argue it's in their interest to at least sound hawkish until they're ready to cut.
Mechanically, you would think that taking out the 25 bps rate hike this year would lead to a 25 bps drop in the median dot in 2024, which would imply 50 bps in cuts next year.
Does it matter if the Fed goes beyond that to indicate 75 bps? A few weeks from now I'm sure it won't, though that will be the most-important part of the reaction today.
Another scenario that's getting some buzz is putting 75 or 100 bps on the board but raising the longer run dot by a tick? It's a creative strategy but I have a hard time making sense of it academically because all the evidence of the past couple months argues that we're headed back to a period of low inflation.
Finally, I'd encourage everyone to look at the entire dot plot. The market gets hung up on the 'median' but individually, there were already FOMC members saying the Fed would cut 100 bps next year, with one seeing 275 bps in cuts by the end of 2025.
None of this is written in stone by any of them -- it's written in sand on a windy day. There will be a market reaction but it's not going to be a game changer (as much as many equity market participants would love a dip to buy).
