Rate Cut Thesis

For the last four months, the potential for Fed rate cuts in 2024 has been a key topic. However, there has been a significant disparity between the market's expectations and the Fed's guidance since November, making yesterday’s Fed decision and commentary challenging for the market to interpret.

At the beginning of the year, the Fed fund futures market predicted six rate cuts in 2024, while the Fed's guidance indicated an expectation of only three cuts due to concerns about inflation risks.

As anticipated, the Fed maintained its current rates yesterday, but its statement revealed substantial changes. The committee highlighted ongoing improvements in various areas of focus, such as the labor market and overall economic activity. However, the statement cast doubt on a rate cut in March, stating that it would not be appropriate until there is greater confidence that inflation is moving significantly toward 2 percent.

During his press conference, Chairman Jerome Powell emphasized that the committee is not likely to have sufficient confidence for a rate cut by the March meeting, emphasizing the need for continued positive data rather than just better data.

Powell and the committee maintained a cautious tone to manage market expectations, expressing concerns that premature loosening of financial conditions could lead to increased inflation and economic instability.

Later this week, more labor market data will be available, but early indications suggest a cooling labor market. The market's reaction was mixed, with stocks declining and bonds rallying sharply. While Fed Fund futures are adjusting, there is still a 36% chance of a rate cut in March.

Despite Powell's clear stance, there remains uncertainty in the market about future rate cuts, and the coming days and weeks will reveal whether this sentiment changes.