Traders Lose Faith In March Fed Rate Cut, But Still Bet On 6 By Year-End

A March interest rate cut by the Fed is now less likely than before, but traders remain optimistic, expecting six rate cuts by December 2024.

Market-implied probabilities, derived from Fed futures, indicate a 58% chance of interest rates remaining unchanged in March. This is a remarkable shift from the previous scenario, which saw the market strongly tilted toward a rate cut until last week.

Target Rate Probabilities For March 20 Fed Meeting

Fed Funds Target Rate	Probabilities Jan. 22	1 Week ago	1 Month Ago
475-500	1.1%	4.1%	12.4%
500-525	41.5%	76.9%	75.6%
525-550 (Current)	57.5%	19.0%	12.0%

Strong Economic Data Crashes March Rate Cut Hopes

The abundance of robust economic indicators has dealt a blow to the possibility of premature interest rate cuts by the Federal Reserve in the first quarter.

January has brought forth a slew of positive labor market statistics, including a notable increase in December non-farm payrolls by 216,000, significantly surpassing the consensus estimate of 170,000. Jobless claims have dipped to their lowest levels since September 2022, underscoring the ongoing strength of the job market.

On the consumer front, U.S. households have displayed remarkable resilience, even in the face of historically high interest rates. Retail sales for December posted 5.6% year-over-year growth, reaching a 10-month high. Additionally, the latest consumer sentiment survey conducted by the University of Michigan revealed the highest level of optimism in two-and-a-half years.

As the economy exhibited robust performance throughout the holiday season, there has been a resurgence of price pressures, exceeding expectations. In December, the annual inflation rate came in at 3.9%, slightly above the anticipated 3.8%. When excluding food and energy, a key measure of underlying inflation also outpaced forecasts, registering at 3.4% compared to the projected 3.2%.

Traders Continue To Expect 6 Rate Cuts In 2024

Although expectations for a rate cut in March have significantly diminished, Fed futures markets are still pricing in the possibility of six rate cuts — each amounting to 25 basis points — by the end of the year.

Market sentiment indicates an 85% likelihood of a rate cut by the Fed’s May meeting, and a similar high probability is seen for another rate cut in June.

Traders are increasingly positioning for rate cuts at each consecutive Fed meeting up to December 2024, thereby forecasting a year-end target fed funds rate ranging between 3.75% and 4%.

These optimistic market expectations may well explain the recent upward trajectory of U.S. stocks, exemplified by the SPDR S&P 500 ETF Trust SPY, the SPDR Dow Jones Industrial Average DIA, and the Invesco QQQ Trust QQQ, all of which are trading at all-time highs.

Target Rate Probabilities For 2024 Fed Meetings

MEETING DATE	3.25-3.50	3.50-3.75	3.75-4.00	4.00-4.25	4.25-4.50	4.50-4.75	4.75-5.00	5.00-5.25	5.25-5.50
01/31/2024	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	2.6%	97.4%
03/20/2024	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	1.0%	40.5%	58.4%
05/01/2024	0.0%	0.0%	0.0%	0.0%	0.0%	0.8%	30.2%	53.8%	15.2%
06/12/2024	0.0%	0.0%	0.0%	0.0%	1.1%	30.5%	53.4%	15.0%	0.0%
07/31/2024	0.0%	0.0%	0.0%	1.0%	27.8%	51.3%	18.5%	1.4%	0.0%
09/18/2024	0.0%	0.0%	0.9%	25.7%	49.4%	21.1%	2.7%	0.1%	0.0%
11/07/2024	0.0%	0.6%	16.8%	40.9%	31.3%	9.4%	1.1%	0.0%	0.0%
12/18/2024	0.5%	13.9%	36.5%	33.0%	13.3%	2.5%	0.2%	0.0%	0.0%

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Photo: Federalreserve/Flickr and Bylolo/Unsplash.