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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 debt ceiling standoff and talks between congressional leaders to reach an agreement have taken over the spotlight this week, but the future of the Fed’s monetary policy remains very much on investors’ minds.
According to the CME FedWatch tool, up till even a week ago on May 12, markets were pricing in a nearly 30% chance of a 25 basis point cut at the FOMC’s scheduled meeting in July. That probability today has dropped to zero.
Similarly, up till a week ago on May 12, markets were seeing a ~48% probability of a 25 basis point cut at the FOMC’s September meeting. That figure has fallen to about 32% today.
In the days after the FOMC’s last meeting on May 3, investors ramped up their bets that the central bank was nearing an end to its rate-hiking cycle, despite no such indication from Fed policymakers who continued to stress a “data-dependent” approach to raising rates and reiterated that bringing down inflation remained the ultimate goal.
A slew of economic data reports recently have also pointed to moderating inflation and a cooling economy, which added support to the case for rate cuts.
However, as the month has progressed, market expectations have become more in sync with Fedspeak.
“The market has rightfully repriced the expected Federal Funds rate since the release of the April labor report on May 5th by slowly ruling out the cuts in 2023,” Macrotheme Capital Management’s Damir Tokic told Seeking Alpha.
Looking at the expectations for a pause in interest rates hike, as per the CME FedWatch tool, up till a week ago the probability of a pause at the FOMC’s June meeting was more than 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%, core PCE sticky at 4.6%, and S&P 500 (SP500) at 12% below the all-time highs and ready to burst higher. Thus, the Fed is likely not done yet, and the cuts will come only when the serious economic and market damage becomes obvious,” Tokic added.
The FOMC’s next meeting is scheduled to take place from June 13 to 14.
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