Nonconsensus Outlook for No Rate Cuts in 2024 Shouldn't Be Ruled Out, Say Experts
The latest consumer price report has taken the market by surprise, causing bonds and stocks to experience a temporary setback. This unexpected turn of events has led to a significant retreat in the federal-funds futures market's predictions for Federal Reserve interest-rate cuts for this year. The market now anticipates three moves of 25 basis points each, compared to the current target range of 5.25% to 5.5%.
This course correction by the market aligns it closely with the projections made during the Federal Open Market Committee's (FOMC) December meeting. The committee had estimated a median fed-funds rate of 4.6% for the end of 2024. Just a month ago, the futures market was predicting at least six 25-basis-point rate cuts by December.
However, experts believe that an even more surprising outcome would be no rate cuts at all in 2024. Although this nonconsensus outlook may seem unlikely, past forecasts going awry suggest it should not be ruled out. Bloomberg Economics, for example, predicted a 100% chance of a recession in 2023 back in October 2022, which did not materialize.
The U.S. economics team at Deutsche Bank, led by Matthew Luzzetti, has put forward two alternative scenarios for the Fed staying put throughout 2024. In a recent research note, the team acknowledges that "the probability of this outcome may not be trivial." While not their base case, the bank's economists forecast four 25-basis-point rate cuts this year, beginning in June.
The first "hawkish" scenario considered by Deutsche Bank assumes a slightly lower unemployment rate of 4% by December 2024, and inflation slowing down at a rate of 2.7% annually, instead of the FOMC's projected 2.4%. In this scenario, the FOMC would maintain its estimate of R-star at 0.5%, resulting in 65 basis points of rate cuts this year, slightly below the FOMC's median projection.
The second, more hawkish, scenario assumes an R-star of 1.5%. This alternative would call for less than 20 basis points of rate cuts, essentially no reductions for the year. Historically, the market has been early in predicting the timing of the liftoff in the fed-funds rate. After the financial crisis of 2008-09, the initial rate hike did not take place until December 2015. This suggests that it would not be unprecedented for the market to be premature once again in its expectations for a pivot in Fed policy.
Analyst comment
Positive news: The market is reevaluating its expectations of Federal Reserve interest rate cuts this year, aligning more closely with the Fed’s projection of a 4.6% fed-funds rate for the end of 2024. There is a possibility of no rate cuts in 2024, although not the bank’s base case. This suggests potential stability in interest rates in the coming years.
Market analysis: The market is currently pricing in roughly three 25-basis-point interest rate cuts this year, aligning with the Fed’s projections. However, there is a possibility of no rate cuts in 2024. The market may be premature in expecting a pivot in Fed policy, as it has happened before. Overall, there may be some uncertainty and volatility in the near term, but the market is cautiously optimistic about interest rate stability in the long run.
