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Market participants have recalibrated their expectations for future rate cuts by the Federal Reserve’s monetary policy committee, data showed on Friday.
The deadlock on the debt ceiling and talks among congressional leaders to reach an agreement have taken center stage this week, but the future of the Fed’s monetary policy is still very much on the minds of investors.
According to the CME’s FedWatch tool, as of a week ago, on May 12, markets were trading at almost a 30% chance of a 25 basis point cut at the scheduled FOMC meeting in July. That probability today has been reduced to zero.
Similarly, up until a week ago, on May 12, markets saw a ~48% chance of a 25 basis point cut at the September FOMC meeting. That figure has fallen to around 32% today.
In the days after the last FOMC meeting on May 3, investors increased their bets that the central bank was nearing the end of its rate-raising cycle, despite no indication from Fed policymakers. no such thing and continued to emphasize a “data driven” approach. to raise rates and reiterated that reducing inflation was still the ultimate goal.
Recently, a slew of economic data reports have also pointed to subdued inflation and a cooling economy, adding support to the case for rate cuts.
However, as the month progressed, market expectations became more in sync with Fedspeak.
“The market has correctly revalued the expected fed funds rate since the April jobs report release on May 5 by slowly writing off cuts in 2023,” Damir Tokic of Macrotheme Capital Management told Seeking Alpha.
As for expectations of a pause in interest rate rises, according to the CME FedWatch tool, until a week ago the probability of a pause at the June FOMC meeting was over 99%. That near certainty has eroded, with the odds now at around 81%.
“The Fed will find it difficult to pause in June with the unemployment rate at 3.4%, the core PCE sticky at 4.6% and the S&P500 at 12% below all-time highs and poised to to break out higher. Therefore, the Fed is likely not done yet, and cuts will come only when the serious economic and market damage is evident,” Tokic added.
The next FOMC meeting is scheduled for June 13-14.