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Fed Primer

With the quarterly webinar this Thursday, I thought we would keep it short and sweet today.

Let’s start with a pop quiz.

Q: Banks can borrow from the Bank Term Funding Program for up to one year. The balance last week was $164B. The first loans were borrowed before March 15, 2023 in the amount of $11.9B. No new loans were made after March 11, 2024. Today’s date is March 18, 2024. The outstanding balance is most likely:

A. $152B

B. $164B

C. $0B

D. $100B

Trick question – it’s none of the above! Somehow, the balance increased to $167B.

The Fed reports the balances as of Wednesday each week. Wednesday last week was March 13th. And the first reported balance from last year was on March 15th.

Q: How many days between March 15, 2023 and March 13, 2024?

A. 364

B. 364

C. 364

D. All of the above

If I bend over backwards, I can maybe see how the one year loan maturity balances shouldn’t be paid down by now. But then again, that’s a lot of mental gymnastics to justify no paydown.


Last Week This Morning

  • 10 Year Treasury ran back up to 4.30%, with 4.35% as the next resistance level
    • German bund at 2.43%
  • 2 Year Treasury at 4.72%
  • SOFR at 5.31%
  • Term SOFR at 5.33%
  • CPI came in a little higher than expected, but nothing like last month
  • PPI also came in a little higher than expected, but also nothing like last month
  • Retail Sales were weaker than expected, the second month in a row


Fed Meeting Primer

The first cut has now been pushed back to June (cough cough what some people have been saying all along cough cough). The big question is whether the recent hotter-than-expected inflation reports will cause the Fed to change the forecast from 3 cuts to 2 cuts this year.

It will only take two Fed members changing their forecast to impact the median, which is what gets reported in the headlines, so it’s definitely possible. Since it’s anonymous, they don’t risk upsetting the boss by changing their forecast.

I don’t think so.

Remember, inflation data is incredibly backward looking. The stats we’re seeing were set into motion long ago. Plus, the BLS just told everyone they increased the shelter component weighting, which we already know is incredibly stale. CPI data is more backward looking than usual.

Everyone is in agreement that the Fed has more work to do. The disagreement is over whether the Fed can still do work while lowering rates. I believe they can.

March 2022 a Fed economist told me, “Real rates are -5.50%. We don’t view hikes right now as applying the brakes, but instead as easing our foot off the gas.” That was my lightbulb moment that the Fed would be hiking more than I expected.

Isn’t the same true going the opposite direction?

Cutting isn’t pressing on the gas - it’s slowly easing off the brakes. The last mile of a marathon may be the hardest, but it doesn’t mean the first 25.2 miles didn’t count. If you step back for a moment and take a look at the progress, maybe the recent month to month change is less alarming.


2021 GDP: 5.4%

2023 GDP: 3.1%


1H 2022 Core PCE: 5.3%

2H 2023 Core PCE: 3.5%


1H 2022 CPI: 8.5%

2H 2023 CPI: 3.4%


1H 2022 NFP: +504k

2H 2023 NFP: +220k


1H 2022 Consumer Spending: 1.15%

2H 2023 Consumer Spending: 0.47%


The Fed needs to be careful at this stage of the game. I think a lot of the perceived strength is wrapped up in a false sense of security in the labor market. If that domino falls, the slowdown highlighted above will rapidly worsen.

If the Fed has any hopes of achieving a soft landing, they need to start cutting soon.

I am sticking with my five cuts this year, one at every meeting beginning in June.


10 Year Treasury 

The 10T is priced at 4.30% on the assumption that the Fed will lower the number of cuts this year from 3 to 2. If they do, 4.30% probably holds.

If they stick with 3 cuts, don’t be surprised to see the 10T move a little lower.

Either way, I’m not sure the Fed meeting will have a dramatic impact on the 10T. The market is already looking ahead to next week’s PCE report.


This Week

Obviously, the big market mover of the week is our webinar. After that, the Fed meeting could carry some weight