The debt markets expect the U.S. Federal Reserve to cut interest rates in spring 2024. In contrast, policymakers believe its premature to discuss rate cuts until they see further evidence of cooling inflation. As of October, annual headline Consumer Price Index Inflation is running at 3.2% compared to the Fed’s 2% target. Fed officials are also signaling that a rate increase remains an option. However, both markets and the Fed ultimately agree that short-term interest rates will move lower in 2024.
Market Expectations
For the near term, current expectations are that rates will hold steady at the Fed’s upcoming December meeting. Beyond that, both debt and equity markets currently signal that interest rate hikes are over. The CME’s FedWatch Tool currently gives a 90% chance that interest rate cuts occur no later than May 2024, with a 60% possibility of a March cut.
U.S. equity markets too have rallied strongly from late October lows, likely in part on expectations that interest rates are at peak levels.
Recent Fed Comments Downplay Rate Cuts
However, policymakers continue to emphasize that it’s too early to discuss rate cuts. At a speech at Spelman College on December 1, Fed Chair Jerome Powell said, “The FOMC is strongly committed to bringing inflation down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective. It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.”
Fed Governor Michelle Bowman struck a similar tone at a speech on November 28, saying, “At our last meeting, I supported the FOMC’s decision to hold the target range for the federal funds rate at the current level as we continue to assess incoming information and its implications for the outlook. But my baseline economic outlook continues…
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