Have No Fear. The Fed's Got This.
The $60K question tomorrow for market participants that hang on the Fed’s every word will be where the Fed’s estimates for real GDP, unemployment, PCE and of course its Fed Funds rate may fall in the updated version of the below tables. The Fed will publish those tables and more tomorrow afternoon in its Summary of Economic Projections. Little attention will be paid to QT, which is the more important of the Fed’s policy tools in our view.
I don’t see the Fed maintaining Fed Funds at close to 4% in 2025 - the Treasury Debt outstanding ($33.9 Trillion) is simply too high to sustain elevated rates.
The Fed will cave and lower its Fed Funds rate well below 4% before Congress and the Biden Administration ever pull back on spending (look for a $2 Trillion-plus fiscal deficit in fiscal 2024).
The other big question is under what scenario will the Fed take rates to zero? I simply do not see Fed Chair Jerome Powell as having the backbone to not take Fed Funds back to zero in 2024 should there be some sort of a negative economic event. I am not sure if that event will be the coming corporate debt maturity wall / high profile defaults, a steep decline in the equity market, a spike in the unemployment rate, or some other negative financial event that will cause the Fed to lower rates to approximately zero and potentially implement QE once again. The Fed will be pressured by the Biden Administration next year to lower rates well ahead of the November General Election.
