The Fed rate cuts discussion heats up
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Investors and analysts are growing confident that the Fed will enter rate-cutting mode relatively soon — with many now betting on a policy pivot in the first half of 2024.
Why it matters: After months in which Fed officials have preached the importance of keeping rates higher for longer to ensure inflation is truly vanquished, market sentiment has abruptly turned in the other direction.
- At their policy meeting in two weeks, Fed officials will need to decide whether to embrace the possibility of near-term rate cuts — or push back against an outlook that is rapidly becoming the consensus baseline.
Driving the news: The rate cuts narrative got a boost Tuesday in comments from Fed governor Christopher Waller, one of the central bank's leading monetary hawks.
- Waller noted that standard monetary rules suggest if inflation continues trending down for several more months, and if "we feel confident that inflation is really down, and on its way ... you could then start lowering the policy rate just because inflation is lower."
- In other words, if inflation returns to 2%, the Fed should ease to avoid throttling economic activity more than necessary. "If inflation goes down, you would lower the policy rate," Waller said at the American Enterprise Institute.
State of play: But rate-cut fever was settling in long before Waller's comments, fueled by benign readings on inflation and the labor market released since the start of November.
- Futures markets now price in an easing by June, with a full percentage point of rate cuts by the end of 2024.
- It has helped fuel a stunning rally in the bond market. The 10-year Treasury bond is yielding 4.27% Wednesday morning, after kissing 5% last month. November is on track to be the best month of returns on bonds since 1985, the Financial Times notes.
What they're saying: "I think there's a risk of a hard landing if the Fed doesn't start cutting rates pretty soon," hedge fund billionaire Bill Ackman said in an interview with private equity magnate David Rubenstein this week.
Yes, but: This pricing is at odds with how Fed officials themselves described their plans as recently as two months ago.
- In the last formal projections issued in September, the consensus view implied only one rate cut in 2024 — presumably near the end of the year.
- The pivot in market expectations since mid-October has been driven by a relative handful of economic data points, so it is an open question how much that will have persuaded the Fed to change its views.
The bottom line: Chair Jerome Powell and his colleagues face a big choice in two weeks — whether to ratify the view that near-term rate cuts are in play or push back against it.
