As Expected, The Fed Declined to Cut Interest Rates Today
As Expected, The Fed Declined to Cut Interest Rates Today
But the FOMC has penciled in only one 25-bps rate cut 2024, and it predicts one fewer in 2025
- The Federal Reserve did not change its main rate, as anticipated, but Fed Chair Jerome Powell did acknowledge progress on reducing inflation.
- Powell once again suggested it’s likely that the FOMC will keeps rates on hold for the foreseeable future as it needs additional confidence to start the cut cycle.
- Additionally, he reiterated that no FOMC officials have a rate hike in their projections.
Market Update: S&P 500 up +2.77% month-to-date
The Federal Reserve’s June rate decision, on the heels of the May U.S. inflation report earlier today, has proved to be a bit of a letdown. Ahead of the rate decision, traders had bumped up their expectations for two 25-basis-point (bps) rate cuts this year, with a 15% chance for the cutting cycle to start in July. And while the Federal Open Market Committee did hold their main rate at 5.25 to 5.50%, they did not follow markets: Only one 25-bps rate cut was penciled in for 2024 in the June Summary of Economic Projections (SEP).
In effect, not much has changed for the FOMC on the economics: Inflation is still above target; the data have been choppy; and the strength in the labor market and the broader economy affords policymakers time to “approach the situation correctly,” as Fed Chair Jerome Powell noted during the press conference.
FOMC June summary of economic projections
What did change, however, given the desire to “get it right,” was the path forward on rates. The median FOMC official only see one cut in 2024, but perhaps more importantly, fewer rate cuts are being eyed further into the future: one cut was taken off the table in 2025, and the longer-run Federal funds rate estimate has moved up from 2.5% in December 2023 to 2.8% in June 2024.
Powell’s press conference appears relatively hawkish compared to the way markets were positioned in the wake of the May U.S. inflation report. Fed Chair Powell specifically pointed out that one data point doesn’t make a trend: “We see today’s report as progress and as, you know, building confidence. But we don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time.”
/ZQ fed funds futures forward curve (June 2024 to December 2026)
Rates markets have quickly adjusted to discount the rate cut cycle starting in November 2024, a drop from earlier in the day when September 2024 was favored for the start of the cycle. It’s possible that a further erosion in Fed rate cut odds in 2024 could be a near-term obstacle for the bond market (where, across the curve, notes and bonds are holding at least a +0.91 rolling one-month correlation with both /ZQZ4 and /SR3Z4).
Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx
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