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Fed holds interest rates, as expected, but eyes multiple cuts in 2024

US bond market rallies on unexpectedly dovish tone, with policymakers indicating a 0.75% fall in interest rates next year.

14 December 2023

A bumper early Christmas present arrived from the Federal Reserve (Fed) in their final interest rate meeting for the year as far as bonds are concerned, with Treasury yields moving aggressively lower across the curve. As expected, the Fed left rates unchanged and said that inflation has (obviously) eased over the year. However, their median forecast for next year pointed to 75 bps of cuts, with core inflation forecast to fall to 2.4% - more dovish than most had expected ahead of the meeting and further acknowledgment that we are now firmly post peak rates.

On the back of this dovishness markets are a bit more aggressive in their assessment as the swaps market is pricing in 125+ bps of cuts, unsurprising given the wide dispersion in the Fed’s forecast dot-plot. Only one can be right but for now though it’s time to relish the dovish Santa rally from Fed Chair Jerome Powell.

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Charles Hepworth

Investment Director
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