US Interest Rates: Will the Fed Now Cut in May?

Treasury
Yield
and
Federal-Funds
Rate

Data
as
of
Jan
30,
2024.
Source:
Federal
Reserve
Economic
Database

Core
inflation
has
fallen
year
on
year
from
a
peak
of
5.6%
in
February
2022
to
2.9%
in
December
2023
(using
the
personal
consumption
expenditures
price
index).
In
the
last
six
months,
core
PCE
inflation
has
averaged
just
1.9%
annualised.

When
Will
the
Fed
Start
Cutting
Rates?

Powell
noted
that
rate
cuts
should
begin
once
the
Fed
gains
“greater
confidence
that
inflation
is
moving
sustainably
toward
2%.”
But
despite
the
six-month
inflation
figure
coming
just
under
that
figure,
Powell
stated
that
“ongoing
progress
to
2%
inflation
isn’t
assured”
as
of
today.

Powell
cited
the
year-over-year
(or
12-month)
core
inflation
figure
still
being
solidly
above
2%,
which
would
suggest
that
year-over-year
inflation
is
the
Fed’s
main
criterion
for
rate
cuts.
Powell
has
noted
that
the
Fed
will
look
to
cut
slightly before the
2%
barrier
is
breached,
although
what
margin
of
proximity
the
Fed
is
looking
for
(2.50%?
2.25%?)
isn’t
exactly
clear.

We
project
year-on-year
core
PCE
inflation
to
hit
2.5%
in
February.
Such
data
will
be
available
to
the
Fed
at
its
March
meeting.
Based
on
this,
we
still
think
there’s
a
solid
possibility
of
a
March
rate
cut.
However,
Powell
stated
plainly
today
that
a
March
cut
is
not
currently
the
committee’s
base
case.
This
is
the
first
time
clear
guidance
has
been
given
for
March,
so
we
now
think
it’s
more
likely
than
not
that
the
Fed
will
refrain
from
cutting
then.
The
bond
markets
are
on
the
same
page,
with
data
from
the
CME
FedWatch
Tool
now
suggesting
odds
are
against
a
March
rate
cut.

Still,
the
Fed
is
laying
the
groundwork
for
rate
cuts.
Language
in
the
official
meeting
statement
shifted
from
being
hawkish
to
more
symmetric
concerning
such
changes.
The
line
“in
determining
the
extent
of
any
additional
policy
firming…”
in
the
December
meeting
became
“in
considering
any
adjustments
to
the
target
range
for
the
federal
funds
rate…”
yesterday.

Expectations
for
March
Fed
Meeting

Probability
the
Federal
Reserve
will
leave
the
federal-funds
rate
unchanged
or
cut
rates
at
its
March
meeting

Data
as
of
Jan
31,
2024.
Source:
CME
FedWatch
Tool

We
Forecast
That
Rate
Cuts
Will
Start
in
May

By
March,
core
PCE
inflation
should
hit
2.3%
year
on
year.
That
data
will
be
available
by
the
Fed’s
May
meeting.
We
think
this
should
leave
little
doubt
about
the
appropriateness
of
rate
cuts,
and
thus
we
currently
think
a
cut
in
May
looks
extremely
likely.
It
is
hard
to
fathom
how
the
Fed
could
wait
much
longer
than
May
if
it
is
to
begin
cutting
before
hitting
the
2%
barrier,
as
it
has
guided.

We
previously
had
a
“skip”
penciled
in
for
May.
Thus,
our
year-end
2024
forecast
of
a
federal
funds
rate
target
range
of
3.75%-4.00%
is
unchanged.
The
bond
market
agrees
with
this
call.

Federal-Funds
Rate
Target
Expectations

The
highest
probability
outcome
for
each
Federal
Reserve
meeting
in
2024
as
of
January,
compared
with
December
predictions

Data
as
of
Jan
31,
2024
Source:
CME
FedWatch
Tool
Upper
bound
of
fed-funds
rate
target
shown

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