A historical Fed meeting

Dot revisions and uncertainty

I have been watching the Fed for about 25 years now. And I cannot recall a meeting with so much uncertainty as the one on September 18th. The market is split on whether the Fed will do 25bp or 50bp. And there is even more uncertainty about where the Fed is ultimately heading. 4%, 3%, 2%, something different?

Dot revisions

The historical nature of the meeting is reflected in the outlook for the dots. We are likely to get record revisions in the dots for both 2024 and for 2025.

Here is how it looks for 2024. The biggest dovish revision to the dots in the past was in September 2019, when dots were revised down by 50bp. But this week, we may get a 75bp revision (from -25bp expected in June, to -100bp expected now).

Here is how it looks for 2025. In 2019, the dots were revised down 50bp, several times. But this time around, we expect a full 100bp revision (in yellow).

Partly, the need for downward revisions reflects the seasonal strength in PCE earlier this year—on price re-sets earlier in the year. But concern is growing about the true state of the labor market, shifting focus onto the employment pillar of the Fed’s dual mandate.

Uncertainty as opportunity

The possible historic Fed pivot this week underlines once more how uncertainty pervades macroeconomics.

And given all the uncertainty about the outlook, unique conceptual thinking and thoughtful data tracking are necessary for investors to stay ahead of the competition. Uncertainty is also an opportunity.

Over the last few months, we have been highly focused on analyzing the destination of rates in the coming cutting cycle. Many of the theories used in 2022-2023 to argue for sustained higher rates (de-globalization, structurally higher commodity prices, pressure from supply) have been hard to match with the reality in the data picture in 2024. Relatedly, China continues to face a historical economic challenge, which could have a sustained deflationary effect, as already observed in global goods prices. 

The table below, something we have referenced multiple times when discussing with clients, helps anchor thinking about R*. Does it look like 2024 is anything like 2005-2007?

Moreover, we are going through an AI revolution. Initially, this has impacted the US economy via additional CAPEX. But in the coming years, the effects of LLM/AI technology will be seen much more broadly, and we will likely entail reduced labor demand in many services industries. This will eventually matter for the Fed too (and we will have much more to say about that in coming posts).

The latest Exante Data newsletter provides a more detailed update on upcoming events.

The content in this piece is partly based on proprietary analysis that Exante Data does for institutional clients as part of its full macro strategy and flow analytics services. The content offered here differs significantly from Exante Data’s full service and is less technical as it aims to provide a more medium-term policy relevant perspective. The opinions and analytics expressed in this piece are those of the author alone and may not be those of Exante Data Inc. or Exante Advisors LLC. The content of this piece and the opinions expressed herein are independent of any work Exante Data Inc. or Exante Advisors LLC does and communicates to its clients.

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