Here’s what BlackRock’s Rick Rieder will be watching for after Fed meeting wraps up

As Waller is one of the more hawkish members of the Federal Open Market Committee, his comment in late November on the potential for lower rates should inflation come down “got a standing ovation from the markets,” said Rieder.

The S&P 500 index
SPX
closed Tuesday at its highest value since Jan. 14, 2022, bringing its gain this year to almost 21% as investors weighed fresh data on inflation from the consumer-price index, according to Dow Jones Market Data. The CPI data showed the rate of inflation in the U.S. slowed slightly to 3.1% in the 12 months through November. 

Financial conditions have eased meaningfully since the Fed’s policy meeting that concluded  Nov. 1, according to BofA Global Research. The U.S. stock market has rallied since then amid a decline in Treasury yields, while corporate credit spreads narrowed and the U.S. dollar softened.

See: Here’s how much financial conditions have eased across stocks, bonds and the dollar ahead of Fed rate decision

“You’ve had a very big move in financial conditions,” said Rieder. Meanwhile, “employment is still solid,” giving the Fed a window to be patient before moving rates lower, he said. 

While inflation has been easing, it has not yet fallen to the Fed’s 2% target. So-called core inflation, which excludes energy and food prices, ran at an annual pace of 4% in November based on the consumer-price index.

The CPI data, released on Tuesday, “once again showed that inflation has declined significantly since last summer, especially excluding shelter, which is coming down too, but more slowly,” said Yardeni Research, in a note. “Fed Chair Jerome Powell is likely to reiterate at his presser “ on Wednesday that core inflation “remains too high and that the Fed is in no hurry to lower interest rates.”

The central bank has held its benchmark rate at a 22 year-high range of 5.25% to 5.5% in a bid to lower inflation. Investors are expecting the Fed will announce that it’s keeping its rate at that current level, after its two-day policy meeting concludes Wednesday. 

The central bank will release its policy statement at 2 p.m. Eastern Time, along with a summary of economic projections, and Chair Powell will follow with a press conference at 2:30 p.m. 

In the projections, Rieder said he’ll be looking for Fed officials to lay out a 2024 forecast that potentially points to gross domestic product rising around 1.5% and inflation easing to about 2.5%. “That’s pretty darn close to a normal economic environment,” said Rieder. 

In his view, such expected levels would mean the Fed might start cutting rates around mid-2024. It would make “little sense” to keep its benchmark rate as high as it is now under that scenario, according to Rieder, who said he anticipates the projections may show 50 basis points of rate cuts next year. A median projection for 75 basis points of cuts would be “surprising,” he said, but “not out of the realm of possibility.”

Traders in the federal-funds futures market are expecting the Fed may cut rates as soon as May, according to the CME FedWatch Tool on Wednesday.

Meanwhile, when it comes to investing in the bond market, Rieder says that he’s been moving out of the front end of the yield curve and “into the belly,” or the part where debt matures in three to seven years.

The yield on the longer-term 10-year Treasury note
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was trading down about four basis points on Wednesday at around 4.16%, falling from around 5% in October, according to FactSet data, at last check. 

See also: Fed will try to ‘Keep calm and carry on’ amidst talk of steep rate cuts and recession