The first major narrative in USD markets will be tested today with the FOMC meeting. Is the Fed truly ready to discuss whether rates should be cut at all? Seems too early for such a discussion given the lack of new projections at the meeting today.

It is becoming increasingly popular to write that the FOMC discussion has moved from “when cuts” to “if cuts”, but it still feels more like a semantic discussion than anything else.

It just doesn’t really rhyme with forward pricing. The overwhelming notion is still that R* is at least 100bps below current nominal SOFR rates. That is NOT consistent with this chatter on whether it is feasible to cut rates at all.

What if R* is above current SOFR rate levels? If the Manufacturing cycle is able to recover (which it evidently is despite setbacks today), how can we conclude that 5% SOFR is restrictive?

We don’t expect any soft clues or commitments on the QT tapering path either. The ON RRP is standing at higher levels than in March, when Powell was uncommitted to the timing of the QT taper, and we see little reason to expect them to take a decision before June.

All in all, not much room for doves. As 2024 pricing is almost back in line with spot SOFR, the next big battleground is whether 2025 will be a high for longer year as well.

Chart 1: SOFR forward pricing