Big Shift in Fed Rate Cut Forecasts
After weeks of jawboning by Fed members, stronger-than-expected inflation and other economic data, markets are still pushing back and pricing in interest rate decreases.
Even then, investors still very much believe that the Fed will lower rates in June; it's really a wash. In the meantime, the markets are almost done with this year's three rate decreases.
Many Fed policymakers gave speeches last week. There were many who leaned wait and see, some who leaned hawkish.
More importantly, economic data as a whole is still trending strongly.
The jobs report on Friday was far better than anticipated, even though wage growth did somewhat slow down in accordance with expectations. That came following the ISM manufacturing index on Monday, which showed signs of contraction for 16 months before rising beyond the break-even 50 mark. The ISM services index on Wednesday, which unexpectedly indicated slower growth, partly mitigated that.
China's economy began to revive at the same time that Europe began to show encouraging indications. These also point to higher growth and more persistent inflation, along with rising copper and crude oil prices.
Similar to late 2023, the Fed's most recent dot-pot forecast called for a median of three rate cuts at the meeting on March 20. However, it was by the smallest of amounts.
Fed Rate-Cut Odds
May 1: According to CME Group's FedWatch Tool, markets anticipate a 4.8% chance of a quarter-point decrease. Investors saw odds of at least a quarter-point Fed drop back on January 16 at 97.5% and 60.5% of a cumulative 50 basis points back then.
June 12: By this meeting, investors are betting on a 53.2% chance of a quarter-point drop, with only a 2.4 percent of a cumulative 50 basis point increase. The odds were 60.4% possibility of at least 25 basis points, with 5.2% of 50 basis points, a week earlier. Markets had a 100% likelihood of at least a quarter-point reduction in the Federal Reserve rate on January 16, a 98% chance of 50 basis points, and a 68.6% chance of 75 basis points.
July 31: By this meeting, the markets are supposing a 72.6% likelihood of at least 25 basis points, a 23.4% chance of 50 basis points, and a 1% possibility of 75 basis points.
Markets remain somewhat (54%), but still lean toward three-quarter point Fed rate reduction for the entire year. A probability of 100 basis points is 21.4%.
Investors projected an 88.5% chance of 75 basis points of easing and a 64% possibility of 100 basis points back on February 17. Markets viewed 125 basis points as very likely on January 16 and 150 basis points as 42.1%.
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