As a practical matter, it doesn’t make much difference whether the Fed tips two or three rate cuts for 2024 in the dot plot refresh at the March policy gathering.

The dot plot’s not a plan, after all, and as Jerome Powell noted at the November meeting, it has a short shelf life depending on the circumstances. True, a diagram showing projections for the price of money from the people who set that price should have a lot of informational value. The problem is, those projections are informed by the same people’s economic projections. In this context, “informed” is a hopeless misnomer. Hopefully you catch my drift.

Critics of the Q4 2023 Fed pivot argue the Committee’s insufficiently attentive to the possibility the neutral rate’s higher, at least in the near-term, and that as such, 2024 rate cuts could in fact amount to actual easing, not just reducing the amount of restriction. I won’t walk back through the math, but suffice to say if neutral’s a lot higher, and depending on inflation outcomes, 75bps of cuts could result in a policy stance that’s not only less restrictive than it needs to be under the circumstances, but actually a bit loose.

The data’s a mixed bag for a Fed trying to thread the needle, land the plane, etc. Inflation overshot for January and February, longer-run price growth expectations are still elevated, wholesale prices rose faster than expected for the past two months, so-called “supercore” measures of inflation are far too high and simple math suggests that unless the MoM inflation readings shift meaningfully lower in a hurry, the Fed’ll be cutting rates this year into 12-month CPI prints that are drifting higher.

And yet, the rebound in consumer sentiment stalled, there are cracks under the surface of an optically robust labor market, high rates on revolving credit may be starting to bite and the spending impulse appears to have waned materially across January and February, according to retail sales figures.

For “his” part, Mr. Market says financial conditions aren’t onerous. Stocks are near all-time highs, inflows to US equity funds notched a record last week, crypto’s making headlines again, credit spreads have compressed to match the tightest levels seen during previous periods of speculation and complacency, and on and on.

Aside from a token reference here, a passing nod there, there’s scant evidence the Fed’s concerned about market froth, notable considering this is the same Fed which in October spent weeks explaining how tighter financial conditions could stand in for a rate hike. They even enshrined that proposition into the policy statement in November, when the word “financial” was added to the sentence alluding to the impact of credit conditions. That passage was removed in the January statement.

Critics see a glaring asymmetry: Tighter financial conditions are a reason not to squeeze in another rate hike, but looser financial conditions aren’t a reason to forgo rate cuts. Small wonder asset prices continue to levitate.

Finally, the Fed has a housing conundrum to grapple with. Elevated rates are perpetuating an acute dearth of resale inventory with the effect of propping up prices. Cutting rates might ameliorate that on the supply side, but lower mortgage rates would also stoke demand. If the incremental demand from marginally lower mortgage rates outstrips any incremental supply unlocked as lower rates loosen the “golden handcuffs,” prices could rise further, making the whole effort self-defeating from a policy perspective.

Frankly, the impossibility of reconciling all of those crosscurrents probably argues against a dot plot shift at the March meeting. Market-pricing for 2024 rate cuts is now basically aligned with the 75bps tipped in December, which represents a significant concession from a market that was priced for more than half a dozen cuts at the extremes.

Sure, the Fed may be able to engineer a risk asset selloff by telegraphing a hawkish evolution in the “median” policymaker’s thinking over the inter-meeting period. But that won’t reconcile competing macro narratives, and I dare say the impact on risk sentiment would be fleeting unless the Committee intends, through the statement language (i.e., forward guidance), SEP and subsequent communications, including Powell’s presser, to introduce the possibility of no cuts this year at all.

That latter option isn’t on the table. Powell made it abundantly clear during his testimony on Capitol Hill this month that January’s warm read on inflation wasn’t an impediment to three rate cuts this year, so it’s difficult to imagine that February’s release would warrant a sea change in Powell’s thinking such that he’s now entertaining the idea of not cutting at all in 2024.

As a reminder, Powell told US lawmakers the Fed’s “not far from” the confidence they need to cut rates. Maybe that meant June or possibly even May when he said it, and maybe it means probably June but possibly July after February’s CPI and PPI overshoots. But it’d be ludicrous to suggest that one warm inflation release can be summarily dismissed on the way to three rate cuts this year, but two warm releases is definitive evidence to rule out all rate cuts, particularly when the releases in question are for January and February (i.e., the first two months of the year in question, which leaves 10 months still to go assuming calendrical past is precedent).

“Investors are anticipating Powell will mark-to-market the messaging,” BMO’s Ian Lyngen and Vail Hartman said, of Powell’s “not far from it” quotable, before noting that such an assumption “isn’t without its own set of risks.” They put it as a question: “What if Powell simply reiterates the cautiously dovish tone that was in place ahead of the recent CPI/PPI updates?” That, BMO’s US rates team said, could be “interpret[ed] as evidence the Fed is unwilling to take Q1’s inflation data too seriously in light of the seasonal bias and the progress made during 2H23.”

Relatedly, Powell could just remind investors that the Fed always said the path to 2% would be uneven and, at times, arduous. The latest data merely underscores that point, nothing more, nothing less. “To some extent that has been the market’s operating assumption thus far and accounts for the willingness to simply roll forward rate cut expectations later into the year as opposed to more seriously pondering the risk terminal is in place until 2025,” Lyngen and Hartman went on.

Make no mistake: The dot plot’s a close call. It’s entirely possible that it’ll tip two cuts this year instead of three and if that happens, the message to markets would be twofold. First, traders would be on notice that the Committee’s i) taking the risk of a rekindled inflation impulse seriously, ii) apprised of, and not enamored with, the perception that this is a Fed that’s tacitly accepted an outcome where inflation settles above target and iii) still entertains the idea, however unserious, that keeping rates at or near current levels will eventually coax price growth back down to 2%. That’s the message the Fed would intend to convey with a dot plot shift. The other, unintended, message to markets would be that this is a Fed still willing to risk a hard landing in the quixotic pursuit of 2%.

Do note that traders will also be eyeing the SEP refresh for any tweak to the core PCE projection. A decisive hawkish shift in the dots would presumably be accompanied by an upward revision to the median price growth forecast. And then there’s the longer run dot — i.e., the neutral dot. That distribution will be checked for any shift that’d suggest policymakers are coming around to the notion that the neutral rate’s higher in the post-pandemic, war era.

Although everyone’s ostensibly free to submit estimates as they see fit, I’d gently note that if the longer run dot shifted up, it’d open a Pandora’s box: Powell would have to explain, during the press conference, the extent to which a higher implied neutral rate means policy wasn’t (and isn’t) as restrictive as the Committee supposed, what that entails for the economic projections in the SEP, how it’ll be factored into the Committee’s thinking around rate cuts this year and so on. I can’t imagine Powell wants to have that conversation, particularly not right now, which to me suggests he’d rather the longer run median not shift at this meeting.

On the QT front, the Fed needs to (and surely will) convey meaningful progress towards establishing the parameters for a taper and, ultimately, an end to balance sheet runoff. They’ve been extraordinarily lucky so far in that RRP drain continues to facilitate a painless QT. RRP balances oscillated between $400 and $550 billion for weeks now, and the Fed shouldn’t push their luck. There’s no reason not to go ahead and socialize the taper so that they’re prepared to start dialing back runoff in May should conditions warrant.

Oh, and Powell will probably be asked about the election at the press conference. He’ll reiterate some version of his remark to Congress: “We stay the heck out of politics.”