The market doesn’t believe the Fed’s new dot plot.

At the June FOMC, the Committee narrowly tipped just a single rate cut for 2024, an ostensibly hawkish lean, at least in the near-term.

From December, the median 2024 marker hinted at a trio of likely cuts this year. The market took that and ran with it, betting on as many as half a dozen reductions, until a succession of inflation overshoots and a generally robust economy supported by steady job gains undercut (no pun intended) those bets.

Beginning in early April, markets began fading the 2024 dot. For more than two months headed into this week’s policy gathering, markets were priced for less easing than the (stale) median from the March SEP.

The question this week wasn’t whether the median 2024 dot would shift up, but by how much. Jerome Powell said officials had a chance to update their forecasts following the release of the May CPI report, but indicated most didn’t. The result: A dot plot that tipped just one, lonely cut.

But, again, the market isn’t buying it. Consider the figure below.

That shows contemporaneous market pricing versus the dot plot at the time. As the highlight indicates, the market’s now nearly 25bps more dovish than the median 2024 dot.

On Thursday morning, BMO’s Ian Lyngen and Vail Hartman listed “six reasons to doubt the dot plot.” Here they are, presented without further comment other than to note that markets are thinking along these same general lines:

1. The timing of May’s CPI release and Powell’s comments regarding the process of updating the SEP in the wake of a top-tier data release such as core inflation has left investors with the impression that the 2024 dot would have been lower had CPI been released before the initial SEP submissions.
2. It would’ve only taken two lowered dots to get the SEP back to 50bps of cuts this year.
3. The details within the CPI data showed core-services ex-shelter (i.e. supercore) was 0.0% in May.
4. There are still three additional CPI prints between now and the September 18th FOMC decision – which will also contain an updated SEP that could easily be revised to show 50bps of cuts in 2024 in the event the data warrants such a change.
5. Evidence of slower spending and stresses on the consumer suggest that the path toward rate cuts might not be based solely on the inflation side of the dual mandate and could lean more heavily on the employment aspect.
6. The G7 now has two central banks (ECB and Bank of Canada) lowering rates and a third (Bank of England) is expected to begin later this summer – such policy divergences don’t persist indefinitely.