USD Rates: SEP shows Fed expects an extended period of resilience
Overnight, the US Federal Reserve’s Open Market Committee kept policy settings unchanged but provided forward guidance that were more hawkish than anticipated. The changes in the SEP (higher GDP growth, lower unemployment rates and broadly unchanged PCE projections for 2023/24 indicate that the Fed expects an extended period of economic resilience. Accordingly, the dotplot shows 50bps less of cuts in both 2024 and 2025. USD rates, which has been semi-braced for a hawkish Fed ahead of the FOMC meeting, broke into cycle-highs with 2Y and 10Y yields touching 5.17% and 4.40% respectively. Interestingly, the Fed kept the longer-run FFR estimate unchanged at 2.5%. 
Current market pricing has gapped close to where the Fed sees policy settings over the coming 2-3 years. There is a slightly higher than 50% chance of another hike in December and just about two cuts factored in (from current levels) for 2024. For 2025, market pricing is still more hawkish, even after accounting for the revised dotplot. Meanwhile, the 10Y breakevens fell slightly, but implied 10Y real rates rose alongside nominal yields. Noting that key technical levels have been broken, there may be a period of adjustment as the market finds the new equilibrium. This is especially so for the 10Y, which might see bias for further upside towards 4.5% in the short term. For the 2Y, we remain unconvinced that there is much more upside as market pricing is already close to what the dotplot shows. Moreover, we think attention may soon shift to a potential government shutdown by the end of the month and the restart of student loan repayments.
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