The markets have eagerly anticipated cuts in the Fed funds rate ever since 2022 when the Fed began to raise it to combat rising inflation. The markets have danced this 2-step where the speculators get ahead of themselves (despite clear communication from the Fed) but then retreat in disappointment when the Fed does what it has already said it will do.
The next FOMC meeting and announcement will be next week on Dec. 18. The options traders are 96% sure that the Fed will cut the Fed funds rate by 0.25% to 4.25% to 4.5%. They are less sure but still centering around a fed funds rate of 3.75% - 4% by Dec. 2025.
The Fed will publish a “dot plot” showing the opinions of the different FOMC members regarding future fed funds rates until 2 years from now. Remember that this is a “best guess” that has been frequently changed over the past 2 years.
Currently, inflation is still higher than the Fed’s target of 2%. Quarterly annualized percent change for 2024:Q4 is 3.09% for CPI and 2.76% for PCE inflation, well above the target and not dropping.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2024 was 3.3 percent on December 9, a strong number with no recession in sight.
The U.S. economy added 227,000 jobs in November, seasonally adjusted, the Labor Department reported about 10 days ago. With upward revisions to September and October figures, the three-month average gain is 173,000, slightly higher than the average over the six months before that.
Apart from pressure on the Fed to lower rates from all the partyers around the punch bowl there is no rationale for the Fed to reduce the fed funds rate. The Fed has announced that they are seeking a “neutral” rate which will neither slow nor stimulate the economy. There’s no sign that the current rate is slowing the economy.
The stock market indexes have stabilized over the past week. The Fear & Greed Index is neutral but the trade is still risk-on as stocks and junk bonds are rising faster than the 10 year Treasury. But some market internals are falling.
The short-term Treasury yield fell while longer term yields rose, causing a Treasury yield curve which is basically flat but with a slight positive slope for the first time in many months.
Like the speculators, I don’t think the Fed will disappoint the markets. They will cut the fed funds rate by 0.25% as expected.
But I do think the market is front-running the Fed again. If inflation stays high the Fed won’t make the expected 4 cuts in 2025.
The METAR for next week is mild weather.
Wendy