No that is not the countdown for a rocket blasting off or even for the first rate cut in 2024. Rather, that is the steady reduction in the estimated number of interest rate cuts this year. Fixed income futures contracts were pricing in up to 6 cuts late last year when Jay Powell and FOMC first began to hint at easier monetary policy. As you can see below, current futures contracts show the first interest rate cut not happening until the September FOMC meeting and just a 50% chance of a second cut by the end of the year.
The Good News: The shift in recent Fed speak and market expectations for fewer interest rate cuts is partially due to a resilient U.S. economy. The labor market has softened but is still very strong with an unemployment rate of just 3.8% according to the Bureau of Labor Statistic’s March reading.
The Bad News: Inflation as measured by the Consumer Price Index (CPI) is still running well above the Fed’s stated 2% target. As of March, the CPI Index showed a 3.5% increase over the year-ago level. The Fed prefers to measure inflation using the Core Personal Consumption Expenditures Index or Core PCE.
The Bad News: Inflation as measured by the Consumer Price Index (CPI) is still running well above the Fed’s stated 2% target. As of March, the CPI Index showed a 3.5% increase over the year-ago level. The Fed prefers to measure inflation using the Core Personal Consumption Expenditures Index or Core PCE.
The most recent PCE rate is also well above the Fed’s target at 2.8%.
The current Fed Funds target range of 5.25% to 5.50% is sufficiently above the inflation rate and therefore restrictive. Hard to see why the Fed would want to cut rates with inflation still running hot and the labor market in a strong position. They will likely want to hold that level until either the inflation rate falls further or the unemployment rate moves higher. For now, Jay Powell, the FOMC, and the rest of us market participants will be keeping a close eye on inflation and employment data for any signs of change.
The current Fed Funds target range of 5.25% to 5.50% is sufficiently above the inflation rate and therefore restrictive. Hard to see why the Fed would want to cut rates with inflation still running hot and the labor market in a strong position. They will likely want to hold that level until either the inflation rate falls further or the unemployment rate moves higher. For now, Jay Powell, the FOMC, and the rest of us market participants will be keeping a close eye on inflation and employment data for any signs of change.