Is it FOMC Day Yet?

Markets muted ahead of FOMC decision. Swap rates and UST yields were little changed ahead of Wednesday’s FOMC decision and dot plot release, which will be followed by BOE and BOJ hike decisions on Thursday and Friday, respectively. With the U.S. and BOE decisions under the microscope, a Bloomberg survey conducted today saw 59% of participants say that gilt yields will hold above their US equivalents for “years.” The 2-year UST yield rose 2bps to 5.05% while the 10-year fell 3bps to 4.30%.

A pause looks penciled in for September. Despite the high anticipation for FOMC day (Wednesday), the decision itself remains clear; a rate pause is effectively locked in by futures markets. Futures suggest a 0.8% chance of a 25bp hike in September, largely due to last week’s non-catastrophic inflation data. While August PPI came in well above forecasts, CPI was closer to expectations, allowing the Fed to wait on further figures in their “data-dependent” methodology.  

But all eyes remain locked in on the updated Fed dot plot. Two items remain heavily debated: will the Fed hike rates further in 2023? And how many cuts (if any) are projected in 2024? Last month’s dot plot predicted 100bps of cuts in 2024, which is similar to current projections. Meanwhile, futures remain split on whether the Fed will hike again (47% likelihood) in 2023.