• The Fed declared Mission Accomplished in its December 13 messaging.

• By adding any to the statement, by highlighting the risk of staying too tight for too long, and by bringing back the transitory narrative, the message was clear: higher for longer is dead.

• Fed Funds Futures now show six consecutive 25 basis points rate cuts starting in March 2024.

Almost exactly two years ago (Dec 15, 2021), Fed Chair Jerome Powell abandoned language involving the word Transitory to describe the inflation problem that had been emerging over the prior six months.

Two years later, Transitory made a comeback, signaling in perhaps the most direct possible way Powell's true confidence in a future policy path that will likely contain no new hikes and some fairly immediate rate cuts on the way.

Fed Speak: Three Big Shifts

To hear the real message from the Fed, you often have to listen between the lines because there are always disclaimers and the Fed never likes to sound overconfident, especially when it can result in large market moves.

In keeping with this principle, in this week's FOMC communications, we heard the usual language about potential additional hikes and the uncertain inflation picture. But that was boiler-plate filler content. Market participants know by now to look past that language and hear the second-derivative tone shift. And that tone shift was quite clear.

First, in the statement, the signal was the addition of one key word: any.

From the November 1 FOMC statement: In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Imagine if your plumber told you, I need to figure out the extent of additional money you owe me as I look over your account.

You would know there's going to be some kind of bill coming due and you need to have your checkbook ready.

Contrast that with, I need to figure out the extent of any additional money you owe me as I look over your account.

There are implied words in that second version. It really says, I need to figure out whether or not there is any additional money you owe me as I look over your account.

That any addition basically downgrades the threat and introduces the potential that there may be no further bill due.

That adjustment was acknowledged by Powell in the press conference, solidifying the sense that the Fed is now ready to shift gears and declare that the hiking cycle is over.

Second, Powell acknowledged, in response to a question, that the Fed is acutely aware of the risk of keeping rates too restrictive for too long. That speaks to the so-called balance of risks. This is a huge factor for the market's sense of the Fed's likely policy path. The Fed's expressed sense of the balance of risks has been skewed toward concerns about a reignition of inflation basically all year. That has now shifted. Clearly, with recent data and the trend in place, Powell's Fed is now unambiguously perceiving the risk of staying too restrictive for too long as a bigger risk than being not restrictive enough.

That unravels the higher for longer narrative in a clean double-tap headshot. Higher for longer: deceased.

Third, Powell made it very clear that the Fed's philosophical orientation on this inflationary period has always maintained an allegiance with the Transitory narrative, even if the Fed's PR department stopped using that term because of its branding defects as people suffer from higher prices.

In perhaps his most explicit rekindling of the theory, Powell stated, This inflation was caused by a combination of demand shocks and supply chain restrictions.

He casually and confidently discussed the idea that this inflationary period was not about a structural problem or a monetary problem, like we saw in the 1970's. Instead, this issue was about the pandemic—about the uneven distribution of demand and supply in various markets for goods and services and labor during the pandemic and upon our normalization as the pandemic petered out and the context normalized.

The Fed finally decided it was safe to publicly return to that framing of reality, which is a huge signal about where things are headed from here.

Where Does That Leave Things?

The current economic outlook suggests that the Fed may adjust its policy stance in the coming months. That was the message from the statement, the projections, and the press conference—as well as from the market's reaction.

Firstly, inflation data is a key factor that will affect the timing of any policy change. Although the Fed's new forecast for core-PCE inflation implies a historical Federal Funds rate around 330 bps, which is 200 bps below the current 525-550 bps band, a significant deterioration in inflation data could prompt the Fed to act earlier.

Secondly, the pace of slowing growth is another factor that will be closely monitored. The Fed's latest Summary of Economic Projections predicts 1.4% GDP growth in 2024, which could lead to slower job growth and prompt the Fed to move earlier.

Finally, long-term yields remain an important consideration. Although the 10-year yield is currently at 4.02%, if it rises back to the ballpark of 4.5%, the Fed may move by March.

In fact, that's exactly what the market is now pricing in: The Fed Funds Futures now show six consecutive rate cuts next year beginning with the March meeting, which would leave the Fed Funds policy rate under 4% by the end of 2024.