FOMC Meets as Global Growth Questions Swirl

The FOMC meeting concludes this afternoon and we provide some early expectations of what we think we’ll see from the meeting in the sections below. With an updated economic and rate forecast quarter-end meetings always have their fair share of intrigue, even when policy is expected to remain unchanged as it will at this meeting. Tapering talk is likely to be pushed off to the November meeting so the real question is what will the dot plots of future fed funds rate increases look like. For that, read on below to find our prognostication.

In our podcast this week we speak with Joel Manby, former CEO of Sea World, Saab, and Herschend Enterprises– the largest family-owned entertainment company in the U.S.  Joel discusses the concept of servant-leadership. The iTunes link can be found here and the Spotify here.

 


What will the Dots Reveal This Time?

One of the principal pieces of information we’ll get this afternoon from the FOMC meeting is the updated dot plot of forecast fed fund rates. What is new with this forecast is it will be our first look at their 2024 rate outlook. We expect that the 2023 forecast will still have two rate hikes, same as in June, but the freshly unveiled 2024 rate forecast could have as many as four rate hikes. That might unnerve markets as they haven’t really thought past 2023 too much.

 

Source: Bloomberg

Now we should probably add the caveat here that the dot plots are merely each participants views on where they think the appropriate fed funds rate should be given their own unique outlook on the economy and how that fits with their view on the appropriate Fed monetary policy. The median rate is the level that gets reported more often than not as it does represent a middle ground in Fed thinking, but it is not accurate to call it a consensus Fed view on where rates will be. Just look back at dot plots of old and the median projections often have little resemblance to what actually transpired.

Be that as it may, this is what the market focuses on in an age of fairly mundane Fed speak coming out of the meetings. As we mentioned above, however, this meeting will be the first in reporting the 2024 outlook and that in itself should be informative. The Fed has not varied its long-run median rate projection of 2.50% even as we moved into and through the pandemic. Thus, if the June 2023 forecast is repeated with two rate hikes moving the funds rate to .050% – 0.75%, it seems reasonable that 2024 could carry as much as four rate hikes (one every quarter) lifting the funds rate to 1.50% – 1.75% by year-end 2024. Then, getting to the long-run rate of 2.50% in 2025 seems imminently possible. The question is does that unveiling of so many rate hikes unnerve the Treasury market accustomed to zero lower bound rates for seemingly months on end?

Perhaps, but perhaps it’s just too far into the future to contemplate the accuracy of such a forecast. Again, these plots are each participants’ (voters and non-voters alike) opinions on where they think rates will be. What’s perhaps more informative is not so much the median rate in 2024 but the range of expectations. It’s far enough out that some may start to expect a material slowing in economic growth that necessitates a cut in rates, or at least a period of stabilization. Again, it will be instructive to see the range of forecasts for the first time.

 


Copper/Gold Ratio Signaling China Growth Angst

We like to check in on the Copper/Gold Ratio versus 10yr Treasury yields as one tell on the future direction of interest rates. But we also like to check in on the ratio just because it does give off signals as to future global growth prospects as well. Copper is used in so many facets of modern economies that its price is a decent reflection of global growth expectations. So, with all the hubbub around the huge Chinese property developer, Evergrande, and its troubles making debt payments we thought we would check in on the ratio to see if its starting to impact the global growth outlook.

 

Source: Bloomberg

As the graph shows, the last month of trading in copper has been decidedly lower and that is not surprising in our view. While the Evergrande story may be China-specific, it does carry a global growth question. If the Chinese government and economy has to deal with a burgeoning debt crisis it is likely to slow their growth expectations in 2022, and perhaps beyond. When the second largest economy catches a cold, the rest of the world at least suffers some sniffles.

Also, stories of Chinese ghost cities and empty high-rise buildings have been prevalent for years, but now may be the time the Chinese government says the piper must be paid. In the circles of China observers there is much speculation that Chairman Xi is wanting to move the Chinese economy away from the model of large, monopolistic corporations generating super-wealth for a handful of billionaire owners. Better to spread that wealth to the masses in his view. Perhaps, this is the time he will not bail out these owners and instead forge ahead on a new socialistic path. Watch this story as it develops as it could provide clues in this regard.


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.11 0.40 0.67 0.99 1.74 2.20
0.50 0.09 0.37 0.61 0.88 1.61 2.09
1.00 0.09 0.34 0.57 0.84 1.51 1.96
2.00 0.32 0.52 0.76 1.39 NA
3.00 0.71 1.33 NA
4.00 1.28 NA
5.00 1.24 NA
10.00 NA

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Published: 09/21/21 Author: Thomas R. Fitzgerald