Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Why The Fed Will Pivot To Rate Cuts Sooner Than You Think

By Jesse Cohen/Investing.comMarket OverviewJul 15, 2022 03:14AM ET
www.investing.com/analysis/why-the-fed-will-pivot-to-rate-cuts-sooner-than-you-think-200627144
Why The Fed Will Pivot To Rate Cuts Sooner Than You Think
By Jesse Cohen/Investing.com   |  Jul 15, 2022 03:14AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
  • The Fed is expected to hike rates more aggressively to control inflation.
  • As such, many have started to worry about a possible recession.
  • In light of that, the consensus is growing that the U.S. central bank will pivot to rate cuts in early 2023.

Market participants have dramatically raised their bets that the Federal Reserve will have to hike interest rates even more aggressively than anticipated in its ongoing effort to tame the highest inflation in decades.

The Investing.com Fed Rate Monitor Tool briefly showed a more than 80% chance of a supersized 100 basis point (bps) rate hike at the end of the July 26-27 meeting on Wednesday, up from 8% the day before.

It was last showing a 44% probability of a 100bps move as of the end of trade on Thursday.

Fed Rate Monitor Tool
Fed Rate Monitor Tool

Markets had broadly priced in a 75bps move before Tuesday’s scorching-hot consumer price inflation report, which showed that headline CPI jumped to a fresh 40-year high of 9.1% in June.

However, they now see a good chance of 175bps in rate hikes over the next four meetings through the rest of the year, bringing the Fed Funds rate to a range of 3.50%-3.75% by the end of 2022.

The U.S. central bank has already raised its benchmark interest rate by 150 bps this year.

Nonetheless, looking further ahead, there is less certainty surrounding the Fed’s rate hike path, with the possibility of a potential rate cut coming into play as early as Q1 2023.

Indeed, mounting signs of slowing economic growth combined with easing inflationary pressures could prompt the Fed to make a U-turn and pivot to rate cuts.

Mounting Recession Signals

With the Fed expected to tighten monetary policy aggressively to fight inflation, many have started to worry about a recession.

Judging by the latest data releases, U.S. economic growth has slowed considerably in recent weeks, with worsening forward-looking indicators setting the scene for an ugly contraction in the third quarter.

Not surprisingly, the Atlanta Fed’s GDPNow tracker now points to a 1.2% contraction for the second quarter.

Atlanta Fed’s GDPNow tracker
Atlanta Fed’s GDPNow tracker

With the U.S. economy shrinking 1.6% in Q1, that would meet the technical definition of a recession, generally defined by a decline in GDP for two straight quarters.

The reaction in the bond market exemplifies the increasing jitters that the Fed will trigger a recession with aggressive rate hikes.

The U.S. 10-year Treasury yield, which approached 3.50% on June 14, tumbled rapidly to as low as 2.75% on July 6 amid a rethink of the monetary outlook.

U.S. 10-Year Treasury
U.S. 10-Year Treasury

At this point, it’s not about if or when the economy will tip into recession; it’s about how severe the downturn will be.

Peak Inflation

Signs that the pace of price increases has peaked and will moderate further in the months ahead are piling up.

The core consumer price inflation index, which strips out volatile food and energy prices, cooled to an annual rate of 5.9% in June, marking a slowdown from the 6.0% rate seen through May.

U.S. Core CPI
U.S. Core CPI

As seen in the graphic above, the core CPI index has slowed for three straight months after peaking at a 6.5% annualized rate in March.

With crude oil and gasoline prices falling sharply from mid-June, headline CPI inflation is forecast to decelerate in July.

And it’s not just the energy-related commodities that are well off their peaks; prices of wheat, corn, soybeans, barley, oats, coffee, orange juice, and even chicken wings are all down at least 20% from their recent highs, adding to evidence that food inflation is moderating.

Commodities Now Vs. YTD
Commodities Now Vs. YTD

As such, the reduced rate of CPI could provide the Fed with another catalyst to start cutting rates again early next year.

Market Prices In Full Rate-Cut In Q1 2023

Given our view for inflation to continue slowing through the rest of the year—combined with growing expectations for a recession—markets are increasingly leaning towards the possibility that a sharp change in Fed policy could come in the months ahead.

In fact, the market is now pricing in one full rate cut in the first quarter of next year as the Fed fights off the recession it created.

U.S. Interest Rate Cut Expectations
U.S. Interest Rate Cut Expectations

Consensus is also growing amongst most Wall Street banks that the Fed will end its current rate hike cycle at its December meeting in response to lower inflation and recessionary conditions.

Bank of America’s top Rates strategist and former N.Y. Fed analyst Marc Cabana published a note on Thursday warning:

“[Bank of America] is making substantial downward revisions to our rate forecasts following our U.S. economics team’s new call for a mild 2022 recession and lower Fed funds rate path.”

Bank Of America Economic Projections
Bank Of America Economic Projections

Disclaimer: The author currently does not own any of the securities mentioned in this article.

Why The Fed Will Pivot To Rate Cuts Sooner Than You Think
 

Related Articles

Gary Gordon
Lies, Bigger Lies And Economic Data  By Gary Gordon - Aug 08, 2022 6

It was the worst of times; it was the best of times. On Friday, the Bureau of Labor Statistics (BLS) revealed that the country created more than 500,000 jobs in July. Equally...

Why The Fed Will Pivot To Rate Cuts Sooner Than You Think

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (18)
Jack Sailor
Jack Sailor Jul 22, 2022 9:40AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
that's the day I pull out of this completely fraud market and just stack silver coin
toheed khan
toheed khan Jul 17, 2022 1:02PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
nice jobe
toheed khan
toheed khan Jul 17, 2022 1:02PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
nice jobe
Mohd Izhar Muslim
Mohd Izhar Muslim Jul 16, 2022 9:51AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thank you for sharing the article 💯
ZS Beck
ZS Beck Jul 15, 2022 10:14AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
They already told us, Rates will be 3-3.5% the end of the year . Whats is this debate every month ? I don't get it. Then you will see where inflation will be.Inventories are building up in retail stores and energy prices are steady, supply chain problems getting better. Shipping container costs already down 30%.Is anybody think 2022 June 2023 June inflation will be high?
William Bailey
William Bailey Jul 15, 2022 9:37AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Rate cuts from? Rates havent gone up enough to do anything about inflation …. The fed is letting inflation run wild!!!
John Berry
John Berry Jul 15, 2022 8:59AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Quit your BS doom and gloom Citadel
John Berry
John Berry Jul 15, 2022 8:58AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Zero chance they raise it 100bps. Zero chance.
Jeff Gordon
Jeff Gordon Jul 15, 2022 8:58AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
agreed. No reason to change their plans based on the larger, forward looking data
Todd Holaday
JustWilliam Jul 15, 2022 8:51AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I agree with this author and appreciate in particular the points about the price drops post mid June. The Fed needs to slow its roll on the interest rate hikes. Let last months .75 have more time to settle in. The CPI print this week was obsolete before it was published IMO.
Dave Sa
Dave Sa Jul 15, 2022 8:51AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
They need to get annual inflation down towards 2%. Slowing down based on a few weeks of a data is short sighted. High interest is good also. Rewards savers, limits housing run-up, provides alternative investments.
Al Ose
Al Ose Jul 15, 2022 8:47AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Totally disagree. They will pause at some point in First half of 23 but any cut may required real damage if inflation above 4%
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email