Investors increase bets on deeper and earlier rate cuts next year

Some Fed officials on Friday gave conflicting views on when rate cuts might begin next year, after Chairman Jerome Powell suggested the Fed may be done raising rates.

“We’re not really talking about cutting interest rates right now,” New York Fed President John Williams said on CNBC on Friday. “We’re very focused on the issues before us, as Chairman Powell said. …That is, have you adjusted monetary policy to a sufficiently restrictive stance?”

Another official, Chicago Fed President Austan Goolsbee, said the recent decline in inflation means policymakers may need to prepare to cut interest rates sooner than previously expected.

U.S. stocks surged on Wednesday and bond yields fell after the Federal Reserve kept interest rates steady and officials forecast three rate cuts next year. Although Powell said last Wednesday that it was too early to say the Fed had finished raising interest rates, he also took the initiative to say that officials would be prepared to focus on when to cut interest rates, a comment that drove U.S. stocks sharply higher.

“The question of when to begin to moderately loosen policy constraints is starting to emerge, and that’s obviously a topic being discussed around the world and a talking point in our meeting today,” Powell said last Wednesday.

Powell’s comments prompted investors in the interest rate futures market to increase their bets on an earlier and deeper rate cut next year. Ahead of last Wednesday’s Fed meeting, they expected about four rate cuts next year, starting around May. After the above-mentioned meeting, they expect the Fed to cut interest rates at least five times next year, with the first cut in March, according to CME Group.

Wall Street economists also changed their forecasts for rate cuts. Goldman Sachs said on Thursday it expected the Federal Reserve to cut interest rates five times next year starting in March. Before that, they expected rate cuts to be three or four times starting in July at the earliest.

Williams said on Friday that it was “too early to think about a rate cut in March.”

Powell and his colleagues have reversed their stance over the past few months as inflation has improved significantly, including so-called core prices that strip out volatile food and energy items.

Government data released last week before the end of the Fed meeting showed that core inflation, as measured by the Fed’s preferred inflation measure, was very tame in November. The U.S. Commerce Department will release the data later this month.

The above data indicate that the core CPI year-on-year increase in November is expected to reach or even fall below 2%, and may reduce 12-month inflation to 3.1%. The Fed’s annual inflation target is 2%.

“Fundamentally, the inflation numbers have been steadily better than expected and people are starting to believe that inflation is gradually returning to target, as we promised,” Goolsby told the Wall Street Journal’s “Take On The Week” on Friday. ” said in the podcast interview.

Goolsby said the Fed should be prepared to raise interest rates if the recent downward trend in inflation reverses. “But at the same time, if we see inflation fall more than we expect, we should also be prepared to acknowledge whether the current level of interest rates is too tight and whether we should ease it,” he said. “

For much of the past two years, officials have been almost exclusively focused on reducing inflation to pre-pandemic levels, even if it meant rising unemployment. The Fed has the dual mission of keeping prices low and stable, and keeping unemployment low.

“Soon we will return to our mission on employment, which is equally important,” Goolsby said. With interest rates at levels that should limit economic activity, officials need to remember that when unemployment rises, oftentimes It will rise a lot. “Unemployment is not going to just gradually increase,” he said.

A third official, Atlanta Fed President Raphael Bostic, said on Friday that he did not think the Fed would need to cut interest rates until the second half of next year. Bostic told Reuters in an interview that he had written in his forecast last week that there would be two rate cuts in 2024.

“I don’t think it’s an imminent thing,” he said.

The last time the Fed raised interest rates was in July, when it raised the target range for the federal funds rate to a 22-year high of 5.25%-5.5%.

Powell said last Wednesday that rate cuts were discussed when officials presented their latest economic forecasts. Eleven of the 19 officials expect the Fed to cut interest rates at least three times next year, and five others think the Fed will cut rates twice.

In September, most officials believed the Fed would raise interest rates once this year and cut interest rates twice next year.

Some former Fed officials have warned that a premature declaration of victory over inflation could make it more difficult for the central bank to sustain slower economic growth needed to completely eliminate inflationary pressures. Looser financial conditions, in the form of lower borrowing costs and higher asset prices such as stocks and bonds, could boost growth.

Asked whether financial conditions had become too loose, Williams noted how they tightened significantly between August and October. “Monetary policy is working as expected,” he said.

2023-12-18 01:40:00
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