Let’s go over the rate cut possibilities and the market expectations. Importantly, who is to blame for wildly wrong rate cut projections?
The steeper the upslope, the less likely there will be rate cuts. If it gets too steep, the next move will be hikes.
Note that there are no Fed meetings in August or October. The Fed’s November meeting is on November 7, shortly after the election.
If the Fed is going to cut rates, there are meetings in May (roughly a 0 percent chance), June , roughly a 17 percent chance, and July is 42.7 percent.
If there is no cut by July, there will be at most one cut before the election.
September Spotlight
On December 26, 2023, the market thought the Fed Funds Rate would be 4.17 percent. The Fed’s current rate is a target range of 5.25 percent to 5.50 percent (5.375 percent),
The market expected 5 quarter point cuts. It now expects one.
Looking Ahead Further
Looking ahead to December, the market does not expect another full point cut.
One has to look all the way out to March of 2025 before the weighted average projection drops to 4.81 percent.
That amounts to 0.565 percentage points (5.375 – 4.81), barely above two quarter-point moves.
Projections Will Be Wrong
These are market projections. The odds it plays out exactly this way are close to zero.
There will be more or less cuts, or there could even be hikes.
Perhaps March of 2025 is as expected, but the path will not be the one currently applied.
Are Rates High Enough?
Bloomberg notes Fed Resets Clock on Interest-Rate Cuts
A string of disappointing inflation data has forced the Federal Reserve to reset the clock on its first interest-rate cut and re-evaluate the trajectory of price growth.
Chair Jerome Powell cemented that message this week when he said it’s likely going to take “longer than expected” to gain the confidence needed to lower rates, dashing hopes for more than two cuts in 2024. Some worry there may be none at all.
“This is confirmation that the Fed’s willing to wait it out,” said Diane Swonk, chief economist at KPMG LLP. “There’s concern of how little it took to stimulate the economy, that there’s still a lot of demand.”
Economists now expect two cuts this year, down from three forecast in March, according to the median estimate in a Bloomberg survey. [Mish Comment: the market does not expect two full cuts until March of 2025 as noted below. But I do not doubt economists expect more.]
“We started worrying about the financial conditions easing again and the potential for the progress on the inflation to stall at an elevated rate, and unfortunately that’s what it’s looking like is happening,” said Marc Giannoni, chief US economist at Barclays Plc and a former Fed economist.
“Why are they telling us they are going to cut rates when we have inflation and a good economy?” said Michael Bordo, an economics professor at Rutgers University.
Hoot of the Day
Claudia Sahm, a former senior Fed economist, blames markets, not Powell. “The degree of motivated listening is mind blowing,” said Sahm, chief economist at New Century Advisors LLC.
Motivated Listening
Yes indeed we have motivated listening, but it’s from the Fed and Sahm herself!
Congrats to Sahm for being in my Hoot of the Day twice this year.
Flashback January 24, 2024: Hoot of the Day, What is the Fed Waiting On?
Should the Fed cut now? That is what former Fed economist Claudia Sahm says.
“What exactly is the Fed waiting on? Cut.”
“The consensus is that core inflation gets a 2-handle on Friday. Total has had it for a while. Powell has repeatedly said that the Fed would not wait until 2% to cut. Hello???”
Hello Claudia!
Perhaps a few questions will answer your question.
- How about data?
- Is the Fed supposed to act on consensus opinion?
- Is approaching the target good enough?
- Core only?
- With housing prices and the stock market blistering?
- Doesn’t anyone ever look at asset bubbles?
- Hello???
Sahm responded by blocking me.
Now she blames the market for listening to the Fed and to her!
I have many times commented the Fed is one of the problems by trying to control market expectations when it proven totally clueless about where things are headed.
“The degree of motivated listening is mind blowing,” said Sahm.
Yes it is. And what a hoot.
The market projections are always subject to change, and it’s crucial to consider various factors that may influence the Fed’s decisions. As we approach the election, the rate cut possibilities become more intricate. It will be interesting to see how the upslope impacts the decisions and whether there will indeed be any hikes before the election. The market volatility adds another layer of unpredictability to the equation, making it challenging to accurately predict the exact path the Fed will take.