Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.3% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

Monetary Policy

Macro Trader: Fed Put Becomes Even More Forceful

Michael Brown
Senior Research Strategist
13 Jun 2024
In contrast to the ‘hawkish Fed’ view that appears to be gathering some traction, the June FOMC meeting was anything but, with policymakers actually lowering the bar to policy normalisation, consequently making the ‘Fed put’ even more forceful than before.

The aftermath of the June FOMC meeting has been dominated by a deluge of comments affirming that this is a “hawkish Fed”, or other such remarks along those lines. 

In my view, that is dead wrong. 

Said comments demonstrate a laser-like focus on the dot plot and, in fact, on just the 2024 median dot, which was revised to show just 25bp of cuts this year, compared to 75bp at the prior iteration back in March. 

This, however, doesn’t represent the full story. 

Not only is the fabled dot plot a famously unreliable beast, with policymakers’ expectations liable to significantly shift between SEP publications depending on incoming data, it was also finely balanced. While the median expectation may well point to just one cut this year, there are still 8 FOMC members who have pencilled in two such moves. It’s not beyond the realms of possibility for more to join this camp in September, if incoming inflation prints continue to behave themselves. 

On inflation, the Committee continue to send a clear message. Price stability is no longer interpreted as reaching precisely 2% inflation, with the target instead having become a range, with 2% as the floor. The SEP projections show this clearly, with both 2024 and 2025’s core PCE projections having been revised higher, by 0.2pp and 0.1pp respectively, while 125bp of easing is pencilled in over the same period. This more dovish interpretation of the inflation aim, following the statement guidance stressing a focus on inflation moving “towards” 2%, clearly lowers the bar to the first cut being delivered.

That bar is further lowered if one considers the labour market. At the press conference, Powell went further than previously in characterising the “unexpected” labour market weakness that may elicit a policy response. Per the Chair’s remarks, said “unexpected” weakening should be interpreted as “more than in the forecast”. Keen observers will note the median 2024 forecast for 4% unemployment, with a tight 4.0% - 4.1% ‘central tendency’ of estimates. Said observers will also note that the May employment report showed unemployment hitting 4% that month. Once again, the bar to meeting this condition, and thus beginning to ease, has been lowered quite substantially.

Putting all this together paints a picture of anything but a dovish Fed. The picture painted is instead one that remains willing, able, and perhaps desperate to cut rates – particularly with the fed funds rate having now spent almost a year at its terminal level.

In simpler words, not only does the ‘fed put’ remain, but it has become even more forceful, and closer to being triggered, particularly with the new guidance surrounding the labour market.

For market participants, this should give the green light for risk to continue rallying, with participants still possessing confidence to move further out the risk curve, knowing that policymakers ‘have their backs’. Dips, hence, should remain relatively shallow, and be rapidly bought into, with the path of least resistance continuing to lead higher over the medium-term, as the increasingly supportive policy backdrop continues to insulate the market from shocks, and keep a lid on vol.

What has mattered all year is not when the Fed will cut rates, or by how much they will cut over the next 12 months. Instead, what has mattered is that policymakers have the ability to ease, to a significant degree if needed, as and when they see fit. It is this which has propelled equities higher during the first half of 2024, and this which should continue to do so into H2.

The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients.

Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.