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So much for a March rate cut.
Fed Chair Jay Powell basically said as much in the press conference that followed the latest Fed meeting Wednesday:
“. . . with strong growth, strong labour market, inflation coming down, the committee intends to move carefully as we consider when to begin to dial back the restrictive stance that we have in place.
We’re going to be data dependent, we’re going to be looking at this meeting by meeting. Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the March meeting to identify March as the time to do that. But that’s to be seen . . . when you ask me about the near term, I hear that as March . . . that’s probably not the most likely case, or what we would call the base case.”
Now markets are pushing out their pricing of rate cuts. Fed funds futures imply rates around 5.28 per cent at March’s meeting, within the current policy range of 5.25 to 5.5 per cent, according to CME data.
Bank of America strategists translate that into a 30- to 35-per-cent likelihood of a March cut, down from 40 per cent Tuesday.
And Powell’s comments clearly had an effect — Goldman Sachs provides this handy chart showing how the March fed-funds futures contract traded during the day:
Earlier in the day, after a slightly weaker-than-expected Employment Cost Index report (+0.9% instead of +1%) and signs of trouble in regional-bank-land, pricing implied a more-than-50-per-cent probability of a cut at the next FOMC meeting.
That was quickly undone by Powell’s comments, and now GS is calling for the Fed’s first 25bp cut in May instead of March:
We think that the best explanation for today’s meeting is that FOMC participants with a range of different views have compromised on likely starting a bit later, probably in May instead of March.
We have therefore pushed back our forecast of the first cut from March to May, but we continue to expect 5 cuts in 2024 and 3 more in 2025. We now expect the FOMC to deliver four consecutive cuts at the May, June, July, and September meetings before slowing to a quarterly pace and adding a final cut this year in December, as shown in Exhibit 2.
BofA has pushed their prediction back further, now forecasting the Fed’s first cut will come in June. The bank expects three 25bp cuts this year and 100bp of cuts next year:
Financial markets, in our view, are pricing in a policy error. Risk assets suffered immediately after Powell said March is not the baseline and markets are now pricing in virtually 100% probability of a 25bp rate cut at each FOMC meeting this year beginning in May. If the Fed wanted to reduce market expectations for easing, it failed. And markets apparently don’t agree with a gradual pace of rate cuts once the Fed starts.
“Policy error” is a pretty big phrase for a two-month delay, but financial markets are pricing a pretty quick pace of cuts next year, as BofA points out:
Markets may be saying the Fed needs to choose between “sooner and slower” and “later and faster.” For now it’s voting on the latter. We agree that risks to our new baseline tilt in this direction.
The Fed also left an in-depth discussion of slowing its balance-sheet shrinkage until March’s meeting, and BofA and GS are now both forecasting May for the beginning of the end of QT.
Overall, the delay means that US banks will have to wait a couple of months longer than hoped for an easing of pressure on deposit costs.
