Marching towards a rate cut?
Nicholas Tocchino
The market anticipates a possible Fed easing cycle in March since the December FOMC meeting. The likelihood of the rate cut initially reaching 90% is now 47%.
Despite the Fed’s confidence in cooling inflation, Global Economist Nick Tocchio questions the timing of the projected upcoming rate cut.
Since the December Federal Open Market Committee (FOMC) meeting, the market has placed high odds on an imminent Federal Reserve (Fed) easing cycle that might kick off as early as March. The chance of the Fed lowering the federal funds rate at its March 20 meeting, as implied by fed funds futures pricing, reached a high of 90% in late-December, and has since been dialed back to 47% at time of writing. US economic data and commentary from Fed officials shifted odds back and forth, but a Fed March cut has been priced as a significant likelihood since December.
Clearly, a cut will likely be the direction of the Fed’s next rate action, but we think the market is getting ahead of itself on timing. While the Fed has greater confidence that inflation is cooling, it is not evident that inflation is truly handled and solidly on track toward its 2% goal. From our perspective, patience from the Fed is warranted, as we believe that the next leg lower in inflation will take longer than market participants anticipate and disappoint expectations for an early pivot as easing is delayed until later in the year.
Probability of a Rate Cut at the Fed’s March Meeting
as implied by Fed Funds Futures
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