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Market Strategist Expects Fed Rate Cuts to Begin in June
The Federal Reserve’s (Fed) interest rate cuts have been a hot topic among investors, with recent economic data causing them to pull back on their bets.
According to Blake Quin, head of US rates strategy at RBC Capital Markets, the Fed may start cutting interest rates in June, but the pace of cuts may be slower than initially anticipated.
What Has Changed?
At the beginning of the year, the market was pricing in six to seven cuts, but now it’s down to zero to three cuts. Blake Quin believes that the initial pricing was excessive, and markets got ahead of themselves with some comments from Waller and Powell, which were over-interpreted to mean that cuts were coming.
However, the data that has come in since then has not pushed back the expected start of the cutting cycle, which is still expected to begin in June.
The Fed’s Pace of Cuts
The improvement in inflation has given the Fed a reason to start pulling back on rates, particularly when considering real rates from a perspective of inflation falling. However, the resilience of labor market data and growth data has taken away the urgency to move rates more quickly.
The Fed is now expected to cut rates every other meeting, with three cuts in total, down from the initial expectation of five cuts every meeting after June.
Bond Market Action
The massive selloff in the bond market, with yields spiking higher, has led to questions about whether there is more room for yields to rise. Blake Quin believes that the market is pretty well priced, with investors still leaning long into the market. If the 10-year yield rises to the 4.30-4.50 range, there are people who will support the market.
Overall, the Fed pricing is in a good place, with markets always pricing in some risk of a greater slowdown, which will keep yields from rising too much.
The Fed’s Soft Landing
The soft landing is the consensus view, but the real question is how the Fed will shape up in 2025. With only two cuts expected in 2024, there is more interest in how the Fed will shape up in 2025. Will there be a re-acceleration, or will there be more downside risk? The terminal rate is a short-term question, with markets focused on the number of cuts the Fed will show at its upcoming meeting.
Conclusion
As the Fed prepares to meet next week, investors are focused on the number of cuts the Fed will show. However, the real question is how the Fed will shape up in 2025, with more interest in the risks and potential for a re-acceleration or more downside risk.
So, as you consider the Fed’s actions and the market’s expectations, ask yourself: What does the future hold for the Fed’s interest rate cuts, and how will it impact the market in 2025 and beyond?
