Markets Wonder If There Will Be Only Two Rate Cuts This Year

Article originally posted on Globe St. on April 5, 2024

At the Federal Reserve, representatives say one thing and another. But the loudest voice is data, and it’s currently murmuring that rate cuts will be a long way off — and possibly not be the three reductions the Fed is currently promising.

The Fed always brings up the dual mandates of controlling prices via inflation and supporting full employment. However, there is an apparent shadow third mandate: don’t spook the markets.

Investors, taken in a collective mass, have been assuming for a while that interest rate cuts would come quickly and decisively. It’s only now, after repeated admonitions from the Fed, that they seem to have begun hearing that rate reductions aren’t going to be either.

Investors are now forecasting about 65 basis points of rate reductions in 2024, compared to the 75 basis points signaled by the median estimate of projections released following the Fed’s March 19-20 meeting, according to Bloomberg.  “The reassessment is driving investors to demand higher rates of return on US government bonds,” the publication said, noting that yields on Treasury debt maturing in five to 30 years climbed to the highest levels this year Tuesday.

The Fed tends to look using a long lens of 12 months of collected data when deciding actions on rate changes. The numbers had been showing a path of falling inflation growth. Then came December 2023, when inflation rose to 3.4% year over year. In January, it came back down to 3.1% year over year. February came in at 3.2%. And then, at the end of May, the core PCE (personal consumption expenditures) grew at an annual 2.8%.

What does all this mean? Fed Chair Jerome Powell has recognized the changes from what the central bank had wanted, but then said two apparently contradictory things in a speech at Stanford. First, “If the economy evolves broadly as we expect, most FOMC participants see it as likely to be appropriate to begin lowering the policy rate at some point this year.” Then, “We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2 percent.”

In a CNBC interview, Atlanta Federal Reserve President Raphael Bostic said that inflation would decline “much slower than what many have expected.” He added, “If the economy evolves as I expect, and that’s going to be seeing continued robustness in GDP, unemployment and a slow decline of inflation through the course of the year, I think it would be appropriate for us to do start moving down at the end of this year, the fourth quarter,” he further said.

“I continue to think that the most likely scenario is that inflation will continue on its downward trajectory to 2 percent over time,” said Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland in an April 2 speech. “But I need to see more data to raise my confidence.” She didn’t think there would be enough data to make a decision by the next meeting.

Now take the comments and some math. If there is a rate cut in July, maybe three are possible for the year. But past that, two at most and maybe one.

There is also the question of why, from a point of pure economics, the Fed wouldn’t just leave rates where they are. The economy has been growing at a decent rate and labor markets have been strong. And, most of all, inflation isn’t falling to the level the central bankers want to see. Perhaps the answer will end up no rate cut at all, at least for this year.