The Fed has a way to convey where it sees the Fed Funds Rate in the coming years via the dot plot.  The bond market has a way to make its own bets via Fed Funds Futures (and one could argue that cash trading also captures quite a bit of Fed expectations in shorter maturities like 2yr notes).  When September's dot plot came out, it showed no change in the Fed Funds Rate at the end of 2023, but it also shifted 2024's rate cut expectations from 50-75bps to 0-25bps. 

This "higher for longer" was not much of a concern for shorter-term rates, but a big concern for longer-term rates.  That concern has since been erased from trading levels.  The question is whether or not markets have gotten too far ahead of the Fed.  

The chart above suggests that the "higher for longer" was not an immediate reaction to the dots.  Perhaps it was at first, and to be sure, the dots served as a backdrop against which to digest the incoming economic data.  But without that data, the sell-off could not have commenced at the prevailing pace.  There was also an element of uncertainty over the ongoing increases in Treasury auction sizes that has now been (probably) resolved.  

Longer term bonds found a reason to rally well before shorter term bonds began pricing in a softer stance from the Fed in 2024.  Even if we focus on the Fed Funds Rate expectations themselves (much less relevant for mortgage rates), we see that much of the recent improvement is data driven.

If Waller and Powell wanted to push back on a bond market that was getting ahead of itself in late November, they had a chance.  If today's dots fail to corroborate the correction seen in 2yr notes and Fed Funds Futures, it would be the bigger deal for 2yr notes and Fed Funds Futures.  Longer term rates would be relatively more insulated.  Even then, the bond market is OK not being perfectly on the same page as the Fed.  Traders understand that the Fed needs to maintain a bit more of a hawkish stance in the dots.  As such, traders are expecting some unknown amount of moderation to be seen in the dots, but NOT as much moderation as seen in Fed Funds Futures.  We won't really know where that magic line in the sand is until we see how markets are reacting.  The point, however, is that the mismatch is understood and it, alone, does not doom us to disappointment this afternoon.