This week there have been some big shifts on the market’s thinking around the path of Fed policy. Given the market moves, it’s no surprise that’s in a dovish direction.
At the start of the week, the Fed funds futures market was pricing in 74 bps of rate cuts by the end of 2024. That’s up to 99 bps now, so a full rate cut has been priced in.
At the same time, the timing of cuts has moved up. The market now sees an 80% chance of a cut in May with 50 bps of cuts priced in by the July 31 meeting.
Some of these moves are a reflection of the possibility of a hike in December or January being priced out after the Fed decision. In his press conference, Fed Chairman Jerome Powell was in no rush to push back on market pricing at the time, which showed only a 25% chance of a December hike. That’s since dwindled to just 7%.
Accelerating the trend were a pair of soft reports on Friday in non-farm payrolls and ISM services. That has the market convinced that the slowdown in economic activity and inflation that the Fed wants to see is here.
The week ahead is light on US economic data so the trends in markets this week could easily extend, though watch for pushback from Fed officials.