Markets are pricing in a March rate cut but not everyone is buying it


The Fed pivot has markets increasingly expecting rate cuts to begin earlier in 2024. These cuts are also anticipated to be much deeper than what the Federal Reserve forecast for next year.

As of Thursday, markets have priced in a roughly 80% chance of the first rate cut coming in March, per the CME Fed Watch Tool. This falls in line with the latest forecast from Goldman Sachs, which in a week’s time shifted its expectations for rate cuts from the fourth quarter of 2024 to March.

Goldman cited the Fed’s commentary that inflation will fall faster than previously anticipated, along with recent inflation data that was cooler than expected.

“In light of the faster return to target (inflation), we now expect the FOMC to cut earlier and faster. We now forecast three consecutive 25bp cuts in March, May, and June to reset the policy rate from a level that the FOMC will likely soon come to see as far offside,” Goldman Sachs chief US economist David Mericle wrote in a research note on Thursday.

On Wednesday, the Fed released its latest Summary of Economic Projections (SEP), including its “dot plot,” which maps out policymakers’ expectations for where interest rates could be headed in the future. The dots showed Fed officials see 75 basis points of interest rate cuts next year, 25 more basis points of cuts than previously forecast.

The central bank sees core inflation peaking at 2.4% next year — lower than September’s projection of 2.6%.

Investors took this news a step further though. Prior to the November Fed meeting, markets had priced in just three rate cuts for next year, per Bloomberg data. Now, after two Fed meetings left the benchmark interest rate unchanged and a more promising outlook on inflation emerged, investors see seven rate cuts coming by January 2025.

Still, economists aren’t all in agreement with the markets’ aggressive pricing moves.

EY Chief Economist Greg Daco has been warning that just because a soft landing is in sight, it doesn’t mean the US economy is in the clear.

He told Yahoo Finance Live on Thursday that cost fatigue, caused by consumers still paying more for everything than they did pre-pandemic, could still impact how Americans spend moving forward.

“They’re being a bit more cautious as to how many goods, how many services they purchase,” Daco said. “That’s going to be the key story as we go into 2024. And the key backdrop, the key anchor to a soft landing is a labor market that does not retrench. So far we haven’t seen the type of retrenchment that precedes a recession. Is that going to last?”

Daco noted that the Fed’s acknowledgment that it’s closer to implementing cuts rather than another hike was “very important,” but it doesn’t fully justify how market expectations have moved.

“We have to be a little bit careful with the market pricing of rate cuts,” Daco said. “The Fed is not going to be in a hurry to cut rates very rapidly, unless there is a recession… So the euphoria about this soft landing and this environment where we’re not going to see any slowdown, perhaps is overdone.

“The Fed is not going to be slashing rates very rapidly.”

Other economists agree with Daco. Wells Fargo, Morgan Stanley and Deutsche Bank are still projecting rate cuts to begin in June.

Wells Fargo’s team of economists view June as the starting point for reductions because they believe the central bank will need to keep rates high amid “still solid employment growth and elevated inflation.” But eventually, they see the restrictive stance from the Fed paving the way for cuts.

“We expect lackluster economic growth, a weakening jobs market and a continued slowdown in inflation to induce the Federal Reserve to start cutting the Fed funds rate,” the team wrote in a research note on Thursday.

Key to Wells Fargo’s call is how deep the economic slowdown becomes. If recession hits, Wells Fargo sees 225 basis points of cuts by the first quarter of 2025, about 50 basis points more than current market expectations. If that full slowdown doesn’t come, Wells Fargo sees cuts happening at a “much slower pace.”

Josh Schafer is a reporter for Yahoo Finance.

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