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Given recent CPI and PPI data, it appears that inflation is proving to be persistent and the age old saying that ‘the last mile is always the hardest’ is ringing true. The chart below graphs the path of rate cut expectations priced by markets. In other words, it illustrates how much markets expect the Federal Reserve (Fed) policy rate to fall by the end of this year. Focusing on summer last year, markets expected that the policy rate would fall by approximately 1.7% by the end of 2024. If a rate cut is 0.25%, this would equate to six to seven cuts by end 2024. Fast forward to February 2024, these rate cut expectations have peeled back to less than 1% of cuts, or approximately three to four cuts of 0.25%.
The reversal of rate cut expectations brings market pricing
much more in line with central bank dot plot projections. The tempering of
expectations has also fed through to the timing of rate cuts with the projected
start date of interest rate decreases pushed out from March of this year to
June. A key release to watch this week will be the Federal Open Market
Committee (FOMC) statement that will contain updated economic projections –
potentially giving greater insight into when rate cuts will start, how fast
those rate cuts will come, or if the Fed will simply press pause on the
prospects of rate cuts until further into 2024.
