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Fed Rate Cut in June? Data Throws Cold Water on Dovish Hopes

Published 04/03/2024, 08:12 AM
Updated 07/09/2023, 06:31 AM

Forecasts that the Federal Reserve will start cutting interest rates in June took another hit after Monday’s relatively firm manufacturing survey data for March.

Markets are still pricing in moderate odds that easing will start at the end of the second quarter, but the incoming data is providing more support for again pushing the date for a dovish policy pivot further down the road.

The latest talking point: the long-suffering US manufacturing sector appears, finally, to be rebounding, based on survey data.

The ISM’s manufacturing PMI ticked above the neutral 50 mark in March, marking the first expansion for the sector since 2022. This could be noise, of course, but for the moment the prospects for recovery are the most encouraging in several years, based on this survey.

US Manufacturing PMI

“If the contraction of manufacturing activity is over, far too soon to say, and price pressures are building in manufacturing, which appears to have been happening for the last three months, then this would have implications for the path for interest rates in 2024,” says Conrad DeQuadros, senior economic advisor at Brean Capital.

Meanwhile, using the policy-sensitive 2-year US Treasury yield as a guide still suggests the bond market has a dovish bias.

The 2-year yield closed yesterday (Apr. 2) at 4.70%, close to a four-month high, but that’s still well below the current 5.25%-to-5.50% range for the Fed funds rate, which suggests the market continues to price in high odds for a rate cut in the near term.

US 2-Year Yield vs Fed Funds Effective Rate

The caveat, of course, is that the 2-year yield has been anticipating a rate cut for more than a year, only to be proven wrong month after month. Is this time different? The case is weakening, based on recent economic data, which continues to suggest that a growth bias prevails for the US.

The Atlanta Fed’s GDPNow model, for instance, is estimating (as of Apr. 1) this month’s initial Q1 GDP report will show output expanded 2.8% (real seasonally adjusted annual rate). Although that’s well below Q4’s pace, a 2.8% increase (if correct) indicates a solid rise, and one that implies that rate cuts may be premature.

Nonetheless, Fed funds futures are still anticipating a moderate probability that the central bank will start cutting in June.

Fed Funds Futures Probability

Fresh comments from Fed officials, however, leave more room for doubt about the timing of policy easing.

The critical variable, of course, is inflation, and recent updates suggest that pricing pressure remains sticky so progress toward the Fed’s 2% inflation target will arrive later than recently expected.

“I continue to think that the most likely scenario is that inflation will continue on its downward trajectory to 2% over time. But I need to see more data to raise my confidence,” says Cleveland Federal Reserve President Loretta Mester in prepared remarks yesterday (Apr. 2). “I do not expect I will have enough information by the time of the FOMC’s next meeting to make that determination.”

Is it time to write June off as the starting point for cuts? Not yet, but the probability is slipping that a dovish pivot will begin in two months.

Perhaps Friday’s payrolls report (Apr. 5) for March will provide new clarity. Economists are expecting a softer run of hiring, but still strong enough to keep the economy humming, based on the consensus point forecast via Econoday.com.

Employment Situation

“While June is not off the table, market conviction for a first Fed cut by then is fading,” advise ING strategists including Benjamin Schroeder in a research note. “In the coming weeks we can expect some Fed speakers to remain vocal about June cuts, but in the end the data will be the deciding factor.”

Latest comments

The markets confirm your analysis. Commodity prices have been surging since the December FOMC announcement, and the bond market has been hiking rates since the end of last year. Fedspeak and media speculation about rate cuts seem out of touch … unless something changes in a big way soon they are destined to become a distant memory.
What about the Petrodollar? Or better put, what about the lack of use of the Petrodollar? Is it a future factor?
The Feb should be disbanded it’s just a group of egomaniacs that enjoy manipulating the market Powell calms the market and Minneapolis Fed President Neel Kashkari makes a statement contrary to Powell just to show he has clout. The Fed has no control! The market place should set rates not politians who crave ego gratification
The bond market has been hiking rates since the end of last year. Commodity prices have been surging too. In clinging to its rate cut talk, the Fed is increasingly looking out of touch.
higher for as long as it takes. currently policy - is dovish. look at XHB.
FED rate cut is not of something high significance for the Stock Market. Money supply is already on rise since the end of 2023 throgh the banks. However, it is crucial for to avoid a CRE/Banking crisis. I am still positive for the June cut
Cocoa - ATH Coffee - near ATH Gold - ATH Real estate - ATH Food up 25% Insurance up 25% Rents are up Electricity up Oil at $85 a barrel they ain't cutting anything
Agreed... there is no reason to cut the rate, and plenty of reason NOT to cut it. Historic low and getting back toward ZIRP simply allows companies to buy back stock and inflate their valuations.
The reason to cut rates has nothing to do with economy. it has everything to do with the fact that at 5.5% we are adding 1 trillion in debt every 3 months.
if your government actually learn how to manage spending and debt... that would make more sense
Excellent article.
agreed
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