Traders began the new year clinging to expectations of up to seven quarter-point interest rate cuts from the Federal Reserve this year, or more than double what policymakers sent.
These expectations could be revised as a result of the minutes of the Fed's December 12-13 meeting, scheduled to be released at 2pm EST on Wednesday, by revealing new insights into how officials are thinking about the Fed's most likely path. . Economic inflation.
The stock market rallied through the end of last year based on the Fed's average forecast of quarter-point interest rate cuts in 2024, which would lower the federal funds rate target to about 4.6% from its current level of 5.25%-5.5. %. But soon after the Fed's meeting, prominent policymakers such as New York Fed President John Williams began to push back on expectations of lower borrowing costs, calling talks about such a move “premature.”
“We're looking forward to hearing from you,” said Lauren Henderson, an economist at Stifel, Nicolaus & Co. In Chicago: “We know officials expect at least three rate cuts this year.” “If we see more dovish sentiment coming from Fed officials — and they are satisfied with where inflation is and back from peak levels — that could cement at least three rate cuts this year and raise expectations for more.”
However, she said by phone: “If we hear Fed officials comment on inflation still being high, that may remove some of the urgency to cut interest rates and the market may fall back on its expectations for the number of cuts for this year.”
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On Tuesday, federal funds futures traders factored in a 90.3% probability of five- to seven-point cuts by the end of the year, but pulled back slightly on expectations the first cut would arrive by March. Meanwhile, 2- BX:TMUBMUSD02Y,
10- BX:TMUBMUSD10Y and 30-year Treasury yields BX:TMUBMUSD30Y finished with their biggest single-day jumps in almost a month. Shares of DJIA SPX COMP closed mostly lower.
As a result of the Fed's last meeting in December, “the market felt able to escalate expectations of further interest rate cuts, as the meeting had the effect of expanding the outer limits from five cuts beginning in the middle of the year to at least seven cuts beginning in March.” said former Fed Governor Larry Meyer and others at Monetary Policy Analysts in Washington. “A mid-year start still looks reasonable but the risk is of earlier and deeper cuts.”
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