By the autumn of 2023, our suite of probabilistic models was pointing to the growing prospect of a Fed ‘pivot’. The odds that rates had peaked was estimated to be 90% or more, with a slightly greater-than-evens chance of a cut within the next six months, so by the March 2024 meeting. This was not the message coming from the Fed at the time: the September 2023 summary of economic projections, for example, was consistent with just one 25-basis-point cut in the federal funds rate through the whole of 2024, with the median participant feeling that a target range of 5.00% to 5.25% would be appropriate by the end of that year. Investors were doubtful, with market pricing in late September consistent with between two and three 25-basis-point cuts through 2024, with the first scheduled for the July meeting. In that respect, our models were at one extreme, with FOMC members at the other and investors somewhere in the middle.
Our models take no direct account of what FOMC members say, though of course they are guided indirectly by such commentary to the extent that it is reflected in market pricing. Our models do pay particular attention to the macroeconomic data, and by late September weak business surveys combined with slowing payrolls and a policy stance that had become ‘tight’ were all giving a green light to rate cuts. The pivot, hinted at by our models for some months, finally came in December, when a revised summary of economic projections pointed to three rate cuts through 2024. Investors duly recalculated, and by the end of 2023, market pricing pointed to a greater-than-evens chance of a cut by March 2024 — something our models had been indicating for some time.