Fed Projections and Investor Sentiment
The Fed’s new projections, released on Wednesday, forecast a median of 75 basis points in rate cuts next year, lowering the fed funds rate to between 4.50% and 4.75%. In contrast, traders are betting on a 150 basis point reduction, according to LSEG data. New York Fed President, John Williams, emphasizes the Fed’s focus on determining whether its monetary policy will succeed in bringing inflation back to its 2% target.
James Koutoulas, CEO at Typhon Capital management, believes that the easy money resulting from the Fed’s pivot has already been made. He suggests that further gains in Treasuries may only be possible if the economy experiences a notable slowdown that triggers a rush for safe assets. Koutoulas anticipates volatility in the front-end of the yield curve until the economy weakens further.
Next week’s economic data, including personal consumption expenditures and initial jobless claims, will be closely monitored as they could influence the Fed’s inflation outlook. The current consensus among Wall Street firms, such as BMO Capital Markets and Oppenheimer Asset Management, is that a soft landing scenario will persist, characterized by resilient growth and slowing inflation. These firms expect the S&P 500 to reach 5,100 and 5,200 next year, respectively, compared to its present level of 4719.
Expert Opinions on Bond Market Movement
Jack McIntyre, the portfolio manager for Brandywine Global, suggests that the rapid decline in yields this week was likely caused by bearish investors unwinding their positions after being caught off guard by the Fed’s change in stance. Although yields may experience a temporary rebound, McIntyre predicts that they will resume their decline as inflation cools. He expects the 10-year yield to settle between 3.5% and 3.7% by the middle of next year.
Arthur Laffer Jr., president of Laffer Tengler Investments, holds a less optimistic view of government bonds. He believes that the sharp decrease in yields has already loosened financial conditions, potentially complicating the Fed’s ability to cut rates without triggering a resurgence in inflation. Laffer points to data such as the Atlanta Fed’s GDPNow estimate, which indicates a 2.6% increase in fourth quarter GDP, more than one percentage point higher than mid-November projections.