Investors Reduce 2023 Rate Cut Bets Ahead Of FOMC: Analysts Now Expect Fed On Hawkish-Hold Mode For Longer

Speculators' bets on Federal Reserve rate cuts in the second half of 2023 have been dwindling lately, as economists predict policymakers to stay in a hawkish-hold mode for longer than expected owing to sticky inflation and diminished recessionary risks.

As a rate hike of 25 basis points at the impending Fed meeting is essentially a done deal, investors are primarily focused on the Fed's subsequent actions. 
Investors currently give a 70% probability that the Fed will keep rates at 5%-5.25% in June, according to the latest CME Group Fedwatch tool. 

As of last week, September 2023 was the earliest meeting at which a rate cut was anticipated by market participants.

This event has been pushed forward to November, putting further pressure on U.S. short-term Treasuries, as tracked by the iShares 1-3 Year Treasury Bond ETF SHY, on top of the debt-ceiling turmoil.

According to Bank of America Economist Michael Gapen, the Fed's current tightening cycle will end on May, with the committee claiming that monetary policy is close to being sufficiently restrictive. 

The expert still believes the Fed will maintain an upward bias in its policy rate guidance as strong consumer demand, resilient labor market, and sticky inflation do not indicate the economy is on a precipice. 

Goldman Sachs U.S. Economist David Mericle predicts the Federal Reserve will raise interest rates by 25 basis points one last time in May and keep them locked at high levels for a long time.

ING Expects Shocking 100bps of Cuts By Year End: ING Groep chief economist James Knightley issued a highly dovish view on future Fed rates, predicting that the Fed will lower rates by a whole percentage point by the end of the year, with 50bps cuts in both November and December.

"Historically, the Fed doesn’t leave it long before cutting rates — over the past 50 years the average period of time between the last rate hike cycle and the first rate cut has only been six months" and thus "we should expect a cut by around November," Knightley said. 

The March FOMC minutes also warned that previous recessions caused by financial market struggles tend to be more severe and chronic than typical recessions, the economist noted. 

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