Will They or Won't They Cut?

NEWS!

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Macro Markets

In its post-meeting statement, the central bank is expected to give an important hint about interest rate moves to come by removing a clause from previous statements that reads: “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time,” followed by an outlining of conditions it assesses.

For the past year-plus, the wording has underlined the Fed’s willingness to keep raising interest rates until it reaches its inflation goal. Remove that clause, and it opens the door to potential rate cuts ahead; keep it, and policymakers will signal that they’re not sure what’s coming.

While the market has accepted for months that the Fed is likely done raising rates, the most burning question is when it will start cutting. The Fed last hiked in July 2023. Since then, inflation numbers have drifted lower and are, by one measure, less than a percentage point away from the central bank’s 2% 12-month target.

While the market has accepted for months that the Fed is likely done raising rates, the most burning question is when it will start cutting. The Fed last hiked in July 2023. Since then, inflation numbers have drifted lower and are, by one measure, less than a percentage point away from the central bank’s 2% 12-month target.

Traders in the fed funds futures market are pricing about a 60% chance of a cut happening in March, the first of five or six moves by the end of 2024, assuming quarter-percentage-point increments, according to the CME futures. FOMC members, in their latest projections in December, pointed to just three reductions this year.

The Fed hasn’t cut as aggressively as traders expected absent a recession since the 1980s, and that led to excess investor confidence culminating in the 1987 stock market crash.

For bond traders worried that Jerome Powell will trigger a selloff Wednesday by pushing back on their interest rate-cut bets, here’s a little historical consolation: Federal Reserve meetings are more likely to set off rallies instead.

Since March 2022, even as the central bank pushed through its steepest monetary policy tightening in decades, the three days of bookending its meetings provided a brief reprieve from the bond-market pain. 10-year Treasury yields fell by 67 basis points during that window, breaking from the otherwise sharp push higher, data compiled by Bloomberg show.

That’s not an anomaly of the Fed’s hawkish turn. In the 11 years through 2021 — when 10-year Treasury yields generally drifted lower — almost 90% of the drop occurred around the Fed’s meetings. 

PAYROLLS

To round up the week, we will have the key US non-farm payroll jobs data out on Friday (2 February). After a surprise rosy print for December (+216K jobs added), the consensus has toned down to +180K for January. If the jobs number returns to the upside with a print of +200K & above, it will likely reduce the odds significantly for the initial highly anticipated first Fed funds rate cut at the March FOMC meeting.

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