Fed's Hawkish Shift Alters Market Expectations for Interest Rate Cuts
In a significant departure from earlier predictions, traditional markets have scaled back their expectations from anticipating six 25 basis points rate cuts, now only foreseeing two. This adjustment reflects growing sentiment on platforms like Polymarket, where the probability of the Federal Reserve (Fed) maintaining steady rates into 2024 now stands at 32%, a marked increase from March's mere 7%. As the likelihood that the Fed will leave interest rates unchanged this year surges, a hawkish wave sweeps through the market sentiment, potentially cooling the demand for risk assets including cryptocurrencies and technology stocks.
Despite a healthy uptrend since mid-March, the leading cryptocurrency by market value has witnessed its upward trajectory stall, with its price oscillating between $60,000 and $70,000. Analysts from Bank of America and Societe Generale have adjusted their forecasts accordingly, with the former predicting the first Fed rate cut in December, pushed from an initial June expectation, and the latter not anticipating a cut until 2025.
This shift in expectations comes as recent data casts doubt on the previous consensus that inflation would subside sufficiently to warrant aggressive rate cuts in the latter half of the year. March's robust jobs report and an unexpectedly high inflation figure, marking a third consecutive month of acceleration in the cost of living, have diminished the immediacy of such monetary easing.
Federal Reserve Chairman Jerome Powell underscored the persistence of inflation within the U.S. economy, suggesting that rate cuts may be off the table for the near future. Echoing this sentiment, New York Fed President John Williams highlighted the economic strength as a reason to delay easing monetary policies, stating at Semafor’s World Economy Summit that there's no urgency to cut rates. Similarly, Atlanta Fed President Raphael Bostic and San Francisco Fed President Mary Daly advocated for patience, indicating that any decision to lower rates would be dictated by economic conditions rather than precipitate actions.
In summary, the evolving economic landscape characterized by durable inflation and robust job growth is recalibrating expectations for Federal Reserve policies. As high-ranking Fed officials express a preference for caution and patience, markets are bracing for a slower pace of monetary easing, underscoring the nuanced challenges of navigating post-pandemic recovery amidst persistent inflationary pressures.
Analyst comment
Negative news: Fed’s Hawkish Shift Alters Market Expectations for Interest Rate Cuts
As the Fed takes a more hawkish stance, reducing the likelihood of interest rate cuts, the market sentiment is turning cautious. This could lead to a cooling in demand for risk assets such as cryptocurrencies and technology stocks. The leading cryptocurrency has already witnessed a stall in its upward trajectory. Analysts from major banks have adjusted their forecasts accordingly. Recent data casting doubt on inflation subsiding also supports this shift in expectations. Federal Reserve officials emphasizing the persistence of inflation and advocating for patience further confirm the market’s anticipation of a slower pace of monetary easing.
