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The market observers are seemingly running out of colloquialisms to describe the lack of market conviction. And stock market investors have seemingly moved to the sidelines ahead of the Fed meeting,

Not that there will be any big surprises on the day, but what needs to be ironed out is the rate cut pricing for 2024, which, frankly, can't become any more dovish without evidence suggesting the U.S. economy is approaching a hypothetical "Wile E. Coyote" gravity moment.

The dot plot from September indicated a potential 50 basis points of cuts for the following year. However, this projection was based on a higher terminal rate now considered unlikely to be achieved.

Consequently, if the 2024 dot doesn't shift lower in the upcoming Summary of Economic Projections (SEP), the Federal Reserve would be projecting just 25 basis points worth of cuts. This starkly contrasts market expectations for more than 125 basis points of cuts.

The potential misalignment between the Fed's projection and market expectations creates significant discord among cross-asset traders, especially in the context of the Federal Reserve's insistence on two key points. Firstly, they maintain that the tightening implemented last year hasn't fully manifested in the economy. Secondly, the Committee has declared its intention to oversee additional softening in the labour market, even though job losses aren't a policy goal but rather a means to an end.

This tension reflects the challenge of the Federal Reserve in aligning its outlook and policy stance with evolving economic conditions and market expectations. The divergence between the Fed's projections and market anticipations underscores why the market has little to no conviction.

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SPI Asset Management provides forex, commodities, and global indices analysis, in a timely and accurate fashion on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.

Our publications are for general information purposes only. It is not investment advice or a solicitation to buy or sell securities.

Opinions are the authors — not necessarily SPI Asset Management its officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.

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