The Fed Rate Cut Expectations Declining. Market participants have reduced speculation about how much the Federal Reserve will cut interest rates in 2024. These expectations dropped to the lowest level since October, LSEG data showed on Monday (8/4/2024).
Fed funds futures contracts for December on Monday reflected expectations of a rate cut of about 60 basis points this year, compared with about 150 basis points that had been expected in early 2024.
The outlook for a first rate cut of 25 basis points in June is at 49%, down from 57% last week, CME Group data showed on Monday.
Expectations about how deeply and how quickly the Fed will cut interest rates have changed rapidly over the past few months, as investors have grown increasingly doubtful that policymakers will be able to lower borrowing costs without triggering an inflationary rebound in a strong economy. The Fed projects it will cut interest rates by 75 basis points this year.
As a result, Treasury yields, which are influenced by interest rate expectations, have moved higher. The benchmark 10-year yield, which moves inversely to bond prices, hit its highest level since November on Monday. Data on Friday (5/4/2024) showed unexpected strength in the labor market, the latest in a series of reports reflecting stronger-than-expected growth.
In January, policymakers announced that they would keep policy rates at the current 5.25%-5.5% range until they had “greater confidence” that inflation would reach the Fed’s target of 2%.
The combination of strong data and limited progress on inflation in recent months has reinforced calls among top officials – including Chairman Jerome Powell – for “patience” as they make decisions on when to cut interest rates.
