Fed Rate Cuts on Hold as Inflation Heats Up (Again)

Fed Rate Cuts on Hold as Inflation Heats Up (Again)

Investors Dial Back Expectations After String of Hot Inflation Data

This article explores the dramatic shift in investor expectations for Federal Reserve interest rate cuts in 2024.

At the year’s beginning, the consensus anticipated six cuts totaling 1.5 percentage points. However, a string of higher-than-expected inflation readings and a strong jobs report have upended those predictions.

Swap contracts now suggest the Fed rate will only be 40 basis points lower by year-end compared to the current 5.33%. Options traders are even betting on just one cut this year, and Wall Street banks are revising their forecasts.

Treasury yields across maturities have surged, with the policy-sensitive two-year yield jumping 22 basis points and the benchmark 10-year note exceeding 4.5% for the first time since November.

These developments follow the release of the third consecutive higher-than-expected inflation report, coupled with a robust March jobs report. As recently as early March, markets anticipated three Fed cuts this year, starting in June.

“It appears we’re in a situation where inflation might settle around 3%, prompting the Fed to hold steady,” says Campe Goodman, fixed income portfolio manager at Wellington Management Co.

The strong economic data and persistent inflation pressures are forcing a reevaluation by everyone, from Wall Street strategists to Fed officials themselves. Despite interest rates exceeding the presumed neutral level by more than double, inflation remains a stubborn challenge.

While Goldman Sachs postponed their cut forecast to July from June, Barclays now predicts only one reduction this year. Former US Treasury Secretary Lawrence Summers, a Bloomberg Television contributor, warns that markets must “seriously consider” the possibility of the Fed raising rates again.

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