U.S. Desk Strategy Market Views

May 2024 FOMC Preview: QT to be tapered while real rates remain restrictive

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This FOMC meeting requires looking through an evenly split scenarios window. Overall, the highlight of the May FOMC meeting will likely be the tapering of QT. We believe the Fed wants to keep QT ongoing for longer rather than abruptly stopping. This would require a 2-step process, first the QT taper and second, a shift in balance-sheet (b/s) composition. We envision the Fed will reduce the pace of QT to a slower run-rate (a stepdown toward half of the $95bn per month, eventually to zero QT) and we believe the Fed will use MBS and UST proceeds toward more short-term USTs as auction add-ons. Over time Fed would start growing its b/s again.

May FOMC Scenarios 




Very Hawkish Hold


  • Powell in presser says he could be open to hiking if needed
  • Powell says to ignore dots (i.e. 3 cuts in ‘24) as they are stale
  • Market Impact: Major sell-off in all assets, dollar massive bid

Slightly Hawkish Hold


  • Powell reiterates lack of confidence on future inflation path
  • Powell states he rather stay on hold longer & not hiking again
  • Market Impact: A bear flattener, catalysts drag up all rates

Base-Case: Neutral Hold


  • Powell says tightening is working, mind long & variable lags
  • QT tapering announced (however it will start on 7/01/24)
  • Market Impact: Refunding might matter more, small rebound

Dovish Hold 


  • Focuses on balance-of-risk and cracks under the jobs surface
  • Says likely appropriate to cut rates at some point this year
  • QT tapering announced (effective starting as of this meeting)
  • Market Impact: Bull Steepening, strong risk-on in all assets

Future Rate Cuts for the Balance of 2024

Given the growing underlying cracks in the jobs data, the burden of higher nominal and real rates is having on the margin (for lower-income households, small businesses, CRE/Banks, even larger corporates in high yield), it’s only a matter of time before US macro conditions worsen, in our view. As such, our base case is for 100-125bps cuts in 2024, concentrated in the 2nd half. We have pushed back our 1st cut to July, and it would be a down-payment on easing cycle (Scenario 2&3), allowing them to gauge data in the summer and avoid the 1st cut so close to the election. We also assume Q2 data softens and risk assets rollover, giving them a green light to cut. They may skip September too, but given our outlook, if they skip meetings, subsequent cuts may need to come as -50bp clips as the economy decelerates into end of year/early 2025.

Please see the link above for the PDF with macro and market charts and scenarios table…

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