Markets Hope FOMC Will Offer Glimpse of The Future

Swap rates drift lower ahead of March FOMC meeting. Powell’s press conference and an updated dot plot will highlight tomorrow’s Fed meeting, where the Fed is expected to keep rates unchanged. Swap rates dropped 1-5bps today after strong demand at a $13B 20y UST auction drove the move lower. Swap rates are 30-60bps higher from the start of 2024 but remain well off 2023 highs set in October. Meanwhile, equities rallied as the S&P 500 reached another all-time high, now up 9.2% year-to-date.

Markets await tomorrow’s FOMC announcement and press conference. Tomorrow’s key takeaways will come from the Fed’s economic projections, last updated in December 2023, and Chair Powell’s press conference. All eyes will be on the FOMC’s updated dot plot in particular. Offering a finer point on possible near-term reactions to the update, Bank of America’s head of US rates strategy Mark Cabana said that if the Fed’s dot plot shows only 2 cuts in 2024, the 2-year UST yield will climb by 10bps, the dollar will rally, and risk assets will “take it on the chin to some extent.” 

BOJ lifts negative rates and ends yield curve control (YCC), but questions remain. The BOJ hiked rates for the first time since 2007, setting its target policy rate range at 0%-0.1%. They also ended YCC, which kept yields low across the curve through significant security purchases. Despite the significant changes, the central bank suggested that monetary policy will remain accommodative. The BOJ offered little insight on the timeline for incremental rate hikes, which suggests a gradual process, while also committing to purchases of long-term JGBs as needed. BOJ Governor Ueda stated that “There is still some distance to 2% [inflation]… Considering the gap, I think we will conduct normal policy as I mentioned earlier, keeping the importance of maintaining an accommodative environment in mind.”