Macroscope | Why we better not count on US interest rate cuts this year

In a matter of three months, amid strong US economic data and all-time S&P 500 highs, the outlook for interest rates has changed considerably

The Fed may want to see inflation quashed without triggering a recession, but the more likely scenario is rates will come down only if the economy slows sharply

Reading Time:4 minutes

Federal Reserve chair Jerome Powell speaks during a news conference on March 20. The last mile of the Fed’s battle against inflation might prove the hardest, and markets should prepare for a “no cuts” outcome this year. Photo: AFP

Published: 8:30pm, 4 Apr 2024

Monthly data on manufacturing activity invariably receives little attention from investors. However, in China and the United States, the latest readings have generated more interest than usual. A Chinese gauge of manufacturing output entered expansion territory last month for the first time since last September, providing further evidence that the economy is stabilising.

Yet, while China’s recovery is an important theme on trading floors, it does not move markets the way US economic data does, especially in a year when the world’s most influential central bank expects to start cutting interest rates.

A report on Monday showing US factory activity expanded for the first time since September 2022 not only exceeded the expectations of analysts, it cast further doubt on the most widely anticipated policy shift this year: the Federal Reserve’s signal that it expects to cut interest rates by three quarters of a percentage point.

At the end of 2023, bond markets were pricing in 1.5 percentage points worth of monetary easing this year, with the first reduction expected in March. By the end of last month, however, the timing of the first cut had been pushed back to June. Following the publication of the stronger-than-expected data, the odds of a June cut fell to 50-50. Indeed, markets now expect slightly less monetary easing this year than the Fed itself, data from Bloomberg shows.

Investors have consistently misjudged the timing of US rate cuts. According to a Deutsche Bank report last November, markets have priced in a dovish pivot by the Fed at least seven times, only to scale back their predictions about the timing and magnitude.

This begs the question of whether the Fed will actually reduce rates this year. At the end of 2023, when America’s central bank signalled that it was done tightening policy, the suggestion that borrowing costs would remain unchanged this year seemed preposterous.

Select Voice

Choose your listening speed

Get through articles 2x faster

1.25x

250 WPM

Slow

Average

Fast

00:0000:00

1.25x

.css-1m2rp1p{color:#34b8b5;}Macroscope | Why we better not count on US interest rate cuts this year

Macroscope | Why we better not count on US interest rate cuts this year