Many Bet That the Federal Reserve Will Cut Rates Soon

Article originally posted on Globe St. on November 29, 2023

It seems that the financial planets have aligned and driven many to decide that the Federal Reserve will be compelled to lower interest rates.

It’s what Deutsche Bank’s economists are predicting — 175 basis points off the current federal funds rate range of 5.25% to 5.5%, according to a Reuters report. That would reduce the federal funds target range to 3.5% to 3.75%. The last time the rate was lower than that was before November 3, 2022, according to data from the Federal Reserve Bank of St. Louis.

“Traders are currently pricing in a rate of 4.48% by December 2024, according LSEG data,” Reuters wrote.

Then there is Wall Street, which is “gearing up for rate cuts,” as the Wall Street Journal reported. “Interest-rate futures indicated Monday a 52% chance the Fed will lower rates by at least a quarter-of-a-percentage point by its May 2024 policy meeting, up from 29% at the end of October, according to CME Group data. The same data pointed to four cuts by the end of the year.”

If you want real optimism, there’s always Pershing Square Capital Management CEO Bill Ackman, who thinks the Fed might start cutting rates as early as Q1 of 2024, as he told Bloomberg TV.

Ackman said he had “concerns” about interest rates. I think there’s a real risk of a hard landing if the Fed doesn’t start cutting rates pretty soon,” said Ackman, who says he’s seen evidence of a weaking economy.

The views represent a set of the same thought — lower interest rates — expressed over different time frames. Would the Fed within a two-to-three-month time begin to undo interest rate hikes? That seems hard to believe given how almost a month ago the central bank’s Chair Jerome Powell said, “U.S. inflation has come down over the past year but remains well above our 2 percent target. My colleagues and I are gratified by this progress but expect that the process of getting inflation sustainably down to 2 percent has a long way to go.”

First quarter? It seems hard to believe. Sometime in 2024? That seems more likely, but still not necessarily something that is a given. After what the economy, and country, experienced during the pandemic and after, given the reliance on cheap money so many investors in CRE counted on only to face disruption at higher rates, maybe some patience is called for.