No change in policy rate expected at the upcoming FOMC meeting, with markets fully pricing in a zero-move scenario. The real focus: the 2025 dot plot, QT developments, and a potential shift in the longer-run dot. Market positioning remains critical, with asymmetric risks in play.

2025 Dot Plot: Stability or Hawkish Risk?

December’s SEP showed a split vote landing at a two-cut median for 2025, even as markets priced closer to 3.625%. Expectation: 2025 dot holds steady, but the average could shift higher. Drivers:

• Hawkish tilt from regional Fed presidents could skew the dot plot higher.
• Dovish members adjusting up toward 3.875% as market consensus aligns.

Market impact: 25bp Z5 selloff in recent sessions has priced in some of this move. Pain trade: If the 2025 dot ticks up further, front-end longs (May, June, Z5) and forward steepeners (3y2y, 5y5y) could see pressure. Risk assets/equities vulnerable if Fed messaging turns more hawkish.

Market view: Front-end remains asymmetric to the long side. Labor market in focus over next 2-3 months—one weak print could drive a shift in sentiment. May meeting (~5bps) stands out as a key asymmetric long, covering two payroll reports. May/June trades also compelling with SEP event risk.

QT: Does Powell Signal a Shift?

Markets divided on QT guidance. One camp expects explicit forward guidance, akin to the Fed’s 2024 announcement of a runoff pause. Base case: No statement announcement, but Powell hints at a May pause during press conference.

Risk scenario: If Powell avoids forward guidance during Q&A, spreads could react bearishly. Watch for positioning adjustments based on tone and language.

Longer-Run Dot: 3% to 3.125%?

Potential upward revision to longer-run dot from 3% to 3.125% aligns with GIR expectations. Market strategy: Steeper reds/greens (h6/h7, m6/m7) offer optionality, given the existing 2s5s curve slope.

Bigger picture: Economic acceleration into midterms (per Bessent) could drive h6/h7 outperformance.

While the rate decision is a nonevent, market impact hinges on the dot plot, QT guidance, and Powell’s messaging. A hawkish tilt could prompt repricing across multiple asset classes. Fed’s tone on QT and longer-run rate trajectory remains key. Market volatility likely—position accordingly.