Three rate cuts by the Federal Reserve are anticipated this year. Although indications of a more accommodating Fed have been limited, St. Louis Fed President Musalem mentioned potential economic risks.
The Federal Reserve has maintained a ‘wait and see’ approach, emphasising the need for 2% inflation prior to any cuts. Meanwhile, the market has adjusted its expectations, pricing in 80 basis points of easing, a rise from 40 basis points previously.
Low Chances For March Cut
The chances of a rate cut in the upcoming March meeting remain low, while the May 7 meeting now has over a 50% likelihood. Additionally, a 50 basis points decline is projected for the terminal rate.
This suggests that while monetary easing is expected, there remains a gap between the central bank’s stance and market forecasts. Investors have grown more confident in lower rates arriving sooner, even though policymakers have not explicitly signalled the same level of urgency. Musalem’s mention of economic risks hints at growing concerns within the institution, but without definitive commitments, traders must closely monitor further statements.
Recent pricing shows a notable uptick in expectations, with projected cuts now doubling compared to previous estimates. This shift reflects a broader sentiment that the central bank will be pushed towards action, even as officials remain outwardly cautious. Inflation remains the primary hurdle, with authorities repeatedly stating that easing will only be considered if price stability is assured. Despite this, the likelihood of monetary policy adjustments later in the year has strengthened.
Market Expectations And Policy Shifts
With the upcoming March meeting, markets appear sceptical of any immediate change. However, by May, probability models suggest that more than half of market participants anticipate the first reduction. This adjustment aligns with growing views that policymakers will eventually move in response to slowing economic momentum or external pressures. Additionally, the expected decline in the terminal rate by 50 basis points further reinforces the belief that tightening measures will be reversed at a faster pace than initially forecasted.
Participants should monitor official commentary for any hints of a shift in stance. Inflation data releases and employment figures will be key in shaping upcoming adjustments. If economic conditions warrant it, policymakers may reconsider their cautious approach, accelerating the anticipated easing cycle. These developments will have direct implications for pricing, volatility, and positioning in the near term.
