Source: Finance Association
① Since entering November, the market's bets on the Fed's interest rate cut have become more aggressive. The boldest ones have already called for interest rate cuts to begin in March next year; ② According to a survey of 100 economists, more than half of respondents believe that interest rate cuts will wait at least until July next year, and at the same time, interest rate cuts for the whole year are unlikely to exceed 100 basis points.
As the end of the year approaches, the US stock market, which lacks fresh hot spots, is repeatedly entangled between “aggressive betting that the Fed will cut interest rates at the beginning of spring next year” and “concerns about whether betting on aggressive interest rate cuts will go too far”.
According to the results of a survey of more than 100 economists released on Wednesday, slightly more than half of economists currently still believe that the historic moment when the Fed starts cutting interest rates will be at least eight months from now (FOMC in July next year).
Summary: The market is aggressively betting on the Fed to cut interest rates quickly
According to the schedule, the Federal Reserve will hold a total of 8 FOMC meetings in January, March, May, June, July, September, November, and December 2024. The current federal funds rate target range is 5.25%-5.50%.
According to data from the “Federal Reserve Watch” tool, the Fed's interest rate is currently at 3.75%-4% by the end of next year, and the probability of 4%-4.25% is 26.8% and 31%, respectively. In other words, the market is more likely to think that the Fed will cut interest rates by 125-150 basis points in 2024.
Judging from the current market bet on the “time of the first interest rate cut,” the probability that it will happen in March next year is slightly over 50%, but the probability of “cutting interest rates by at least 25 basis points in May” has reached 86.5%.
Economists don't believe “interest rate cuts are coming soon”
According to this survey conducted from December 1 to 6 of this year, out of 102 economists surveyed, all but 5 believed that the current round of interest rate hikes by the Federal Reserve was over, but 52 of them, slightly more than half, believed that the Fed's first interest rate cut would be at least until July next year.
Cautious tendencies can be more easily seen from another set of data. 72 out of 102 people think that next year's overall interest rate cut will not exceed 100 basis points. The effect is similar to cutting interest rates by 25 basis points each time starting with the FOMC in July.
Citigroup's chief US economist Andrew Hollenhorst explained that everyone agreed that the Federal Reserve will cut interest rates starting in 2024, but the market is underestimating that stubborn inflation will delay interest rate cuts until economic activity slows down more clearly.
Hollenhorst also gave his contextual reasoning: as core inflation strengthens over the next few months, the market's narrative of falling inflation will be broken. Even if the previous forecast does not occur, that is, inflation remains moderate, as long as economic activity remains stable, the Fed may use this opportunity to strengthen their credibility and wait for stronger evidence that inflation has continued to slow.
It is worth mentioning that some economists also answered additional questions about real interest rates. Among them, two-thirds believed that the reason driving the Fed's first interest rate cut would be a rise in real interest rates (policy interest rate - inflation) rather than the US monetary policymakers' desire to stimulate the economy.