JPMorgan's Kelsey Berro on Fed Policy, Market Reactions, and Treasury Yields

Fed Meeting and Market Reaction

• 💡 The market's positive reaction to the FOMC meeting was attributed to expectations being positioned for a more hawkish outcome than what was delivered.
• 🎯 Markets were prepared for more division within the committee, but found a generally coordinated effort towards reaching a neutral policy stance.
• 🔑 The Fed aims to reach a neutral policy, acknowledging a wide range of expectations for what that neutral rate might be (2.75% to 3.75%).

Data Dependency and Rate Cut Probabilities

• 📊 The Fed remains data dependent, with upcoming payroll and CPI reports being crucial.
• ⚠️ The probability of a rate cut in January is currently around 25%, with the risk leaning towards upside rather than downside.
• 📈 The Fed appears sensitive to downside risks in the unemployment picture, as indicated by their Summary of Economic Projections (SEPs).

Treasury Yields and Market Dislocation

• 📉 Despite Fed rate cuts, the 10-year Treasury rate has been rising, creating a dislocation, particularly when compared to falling oil prices.
• 🧐 This divergence is surprising, as typically yields and oil prices trade together.
• 📊 US Treasury yields are lower year-to-date and have been in a tight range (4%-4.25%) over the last three months.

Real Yields vs. Inflation Expectations

• 🧩 The movement in yields can be dissected into real yields and inflation expectations.
• ⚡ Inflation expectations have been well-contained and have decreased, aligning with falling oil prices.
• 🚀 Real yields have remained sticky and high, signaling market testing of higher structural growth and productivity assumptions.