Fed Moving Its 2024 Dots Set To Spur Treasury Yields

By Ven Ram, Bloomberg Markets Reporter and strategist

The Federal Reserve’s dot plot is likely to push back on the notion of deep rate cuts priced in by the markets for 2024, spurring a selloff in Treasuries.

The median of policymakers on Wednesday may show the funds rate for next year at 4.9%, implying 50 basis points of rate cuts. That would fly in the face of market pricing for a reduction that has swung between 110 basis points and 125 basis points over the past few days.

The yield on two-year Treasuries climbed more than 12 basis points at the end of last week after the jobless rate for November, defying predictions, headed lower to 3.7%, hovering near the lowest it has been in decades. A dot plot along the lines portrayed above would send two-year Treasury yields higher toward 5%.

A dot plot schemata that pencils in a reduction of 75 basis points would be at the dovish end of the spectrum and entrench current market pricing on the amount of rate cuts that may be expected next year. It would also revive the rally in Treasuries that we saw before the release of non-farm payrolls data last week.

An outcome where the median for next year indicates a lone 25-basis point cut would be hawkish and signal the Fed has conviction that the current resilience in the labor market will persist for longer than traders expect.

Given the robust economic growth that we saw for the third quarter, the Fed may be emboldened to revise up its estimate for gross domestic product growth for 2024 from the 1.5% it forecast in September.

Of crucial importance will be its assessment of the labor market. Given how strong the jobs market has been, the central bank may estimate it will take longer to reach the 4.1% rate it forecast for next year in its previous set of projections.

In September, the Fed projected core PCE inflation of 2.6% for next year. A revision that is sharply lower would be consistent with a dovish dot plot and revive the rally in Treasuries.

The markets will also be keen to decipher the Fed’s estimate of the real neutral rate — a nirvana state where its benchmark rate keeps employment steady without stoking inflation. Its previous dot plots have implicitly signaled a rate of 50 basis points, and I expect policymakers to stick to that conservative guidance.

At Monday’s close of around 4.70%, two-year Treasuries were trading pretty rich on the curve relative to the Fed’s higher-for-longer mantra. If the Fed pushes back on the notion of deep rate cuts for 2024, the tenor may find it challenging to retain that richness.