It is not without precedent for the market to prejudge the Fed's policy pivot.
Data released by the U.S. Department of Labor on February 13 showed that the U.S. Consumer Index (CPI) in January significantly exceeded market expectations, and the bond market and ** suffered a heavy setback. Following the release of the inflation data, the market sharply lowered its expectations for the Fed to cut interest rates this year, and the Fed is now expected to cut rates about three times this year, each by 25 basis points (the current target range for the federal interest rate is 5.).25%-5.5%).
These expectations are broadly in line with those in the Federal Open Market Committee's (FOMC) Summary of Economic Projections released at its December meeting, which projected the median federal interest rate at 4 by the end of 20246%。However, as recently as late January, the market also expected the Fed to cut interest rates at least six times this year, each by 25 basis points.
An even more surprising possibility is that the Fed will not cut interest rates this year, and that shouldn't be ruled out, as there have been a number of cases in the past that have failed to materialize, including Bloomberg Economics' October 2022 100% probability of a recession in the U.S. economy in 2023.
Federal** interest rate target range at the high end of the range
A team of U.S. economists at Deutsche Bank, led by Matthew Luzzetti, recently proposed two scenarios that could prompt the Fed to "stand still" in 2024, writing in a research note: "The likelihood that the Fed will not cut interest rates this year is not small. ”
No rate cuts are not the basis for Deutsche Bank, which expects the Fed to cut rates starting in June and cutting rates four times this year, each by 25 basis points.
Economists at Deutsche Bank identified two possible scenarios that differ from the FOMC's "median scenarios" and could prompt the FOMC to adopt a "hawkish" stance: one is that the US unemployment rate will end 2024 at 4%, slightly lower than the FOMC's forecast of 41%；The other is that inflation has slowed less than the FOMC**, and the core PCE price index will increase by 2.2 year-on-year at the end of 20247%, up from 24%。
In the first scenario, which could prompt the FOMC to adopt a "hawkish" stance, economists assume that the FOMC will maintain its assessment of R-STAR (the inflation-adjusted "neutral" federal** rate that neither boosts nor slows growth) at 0With an estimate of 5%, economists assume that the FOMC will raise the R-Star to 15%。
The first scenario implies a 65 basis point cut in federal rates this year, or 20 basis points less than the median FOMC. The second scenario implies a rate cut of less than 20 basis points this year, or no rate cut.
Jawad Mian, founder of Stray Reflections, a macro advisory firm for institutional investors, recently pointed out that in the period after the 2008-2009 financial crisis, the market repeatedly prematurely digested expectations of Fed rate hikes, and it turned out that the Fed did not start raising rates gradually until December 2015.
Therefore, it is not without precedent for the market to prejudge the Fed's policy pivot this time.
Text |Randall W. Forsyth
Edit |Guo Liqun
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Market analysis.