When will the Federal Reserve Open Market Committee cut the Fed funds rate this year, if at all?
The CME Group’s FedWatch tool showed the probabilities of different rate-cut scenarios bouncing around on Wednesday before Fed Chair Jerome Powell’s testimony before the House of Representatives.
Based on 30-day Fed funds futures pricing on Wednesday morning, there was still a 59% probability of the Fed cutting 25 basis points off the current target range (5.25%-5.5%) before many primary school children have their last class of the year (June 12).
By the time summer is over and the next school year starts (September 18), Fed funds futures implied a 39% chance that the FOMC will have cut rates by 50 basis points in total. In addition, however, there was a 35% chance that the FOMC would have performed three rate cuts (75 basis points) by that date.
But as the markets and CFOs have learned over the last few months, Powell and other Fed officials are not convinced that the battle with inflation has been won.
In prepared remarks published before his appearance on Capitol Hill, Powell said the FOMC believes that its “policy rate is likely at its peak for this tightening cycle.” He also said, “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
But that’s a big “if.” The U.S. economy has been performing better than many expected months ago, and inflation has remained more stubborn than previously thought.
The president of the Federal Reserve Bank of Atlanta agrees with Powell, and he also sees danger in business executives’ “expectant optimism” about rate cuts.
“Many executives tell us they are on pause, ready to deploy assets and ramp up hiring when the time is right.”
Raphael Bostic
President, Federal Reserve Bank of Atlanta
“While headline inflation is moving in the right direction, a closer analysis reveals that it's not time to give the all-clear signal,” wrote Raphael Bostic, president and CEO of the Altanta Fed, in a post on Monday.
Bostic pointed out that the share of items in the [personal consumption expenditures] price index rising at rates above 5% remained “well above the roughly 20% share that would be consistent with inflation at its target.” Therefore, said Bostic, “price pressures are still a little broader than I'd prefer.”
After talking with business leaders recently, Bostic said he sees another risk related to persistent inflation — that business executives “will pounce on the first hint of an interest-rate cut.” According to Bostic, “many executives tell us they are on pause, ready to deploy assets and ramp up hiring when the time is right.”
Business executives and CFOs may see this as a positive. But Bostic said if that scenario were to unfold on a large scale, “it holds the potential to unleash a burst of new demand that could reverse the progress toward rebalancing supply and demand” and “create upward pressure on prices” Bostic said this new risk “bears scrutiny in coming months.”