Macro

Fed's 2024 Rate-Cut Path a 'Very Close Call' as Market Awaits Powell's Guidance

Fed's 2024 rate-cut path uncertain, with projections suggesting 2 cuts amid mixed market expectations.

By Barry Stearns

6/11, 16:27 EDT
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Key Takeaway

  • The Fed's dot plot may indicate two rate cuts in 2024, but projections are mixed and market reactions could be skeptical.
  • Traders are split on a September rate cut, with federal-funds futures showing a 48.3% chance of a quarter-point reduction.
  • S&P 500 is up 12.4% YTD, while small-cap Russell 2000 remains flat; market movements hinge on inflation data and Fed guidance.

Fed's Rate Decision and Projections

The Federal Reserve is set to make a significant announcement on Wednesday, revealing its decision on interest rates and releasing its summary of economic projections, commonly known as the "dot plot." This summary will provide insights into how many rate cuts officials are anticipating for 2024. The last dot plot, released in March, indicated three rate cuts for this year. However, Rick Rieder, BlackRock’s chief investment officer of global fixed income, suggests that this number might be reduced to two, though he acknowledges that it is a "very close call" with mixed dispositions among Fed officials.

Rieder believes that markets would react "moderately positively" to projections of two rate cuts, but with skepticism about the Fed's ability to implement them within the year. He anticipates the first cut could come in September, though he admits the conviction around this timing is not high. David Mericle, chief U.S. economist at Goldman Sachs, also expects the dot plot to show two cuts in 2024, with a slight increase in the longer-run or neutral rate.

Economic Indicators and Market Reactions

Investors are closely monitoring the U.S. economy and labor market for signs of a slowdown that could lower inflation or indicate sustained economic growth. Inflation, although significantly reduced from its 2022 peak, remains above the Fed's 2% target. A fresh reading on U.S. inflation, measured by the consumer-price index (CPI), will be released on Wednesday morning, just ahead of the Fed's rate decision.

The central bank has maintained its benchmark interest rate at an elevated level to sustainably bring down inflation. Traders in the federal-funds futures market are currently split on whether the Fed will cut rates in September. The CME FedWatch Tool indicates a 48.3% chance of a quarter-point rate cut in September, compared to a 47.4% probability of maintaining the current rate.

Liz Ann Sonders, chief investment strategist at Charles Schwab, notes that the bifurcation within the market is tied to the yield backdrop. Large companies with termed-out debt and higher interest earnings on cash are performing better than smaller companies. The Russell 2000 index, a gauge of small-cap stocks, remains virtually flat for the year.

Bond Market and Long-Term Rates

Bond traders are looking to the Fed's meeting for clues on interest rates through 2025 and beyond. Treasuries inched higher on Tuesday as investors awaited the latest quarterly economic and interest rate projections. The March dot plot indicated three quarter-point cuts in 2024, but robust economic data, including strong May jobs growth, may lead officials to scale back that forecast.

Kevin Flanagan, head of fixed income strategy at WisdomTree, suggests that while one or two cuts might occur this year, the focus will quickly shift to the number of cuts expected next year. Jean Boivin, head of the BlackRock Investment Institute, warns that the bond market should be cautious about anticipating a delayed easing cycle, given the likelihood of inflation averaging above the Fed's 2% target.

Mark Dowding, chief investment officer at RBC BlueBay Asset Management, is focused on the Fed's terminal rate, which he believes is too low at 2.6%. He expects this rate to shift towards 2.75% or higher, advocating caution over longer-dated Treasuries due to high debt levels in the U.S. Kristina Hooper, chief global market strategist at Invesco, anticipates a gradual rate-cut cycle that will support risk assets and economic growth.

Street Views

  • Rick Rieder, BlackRock (Neutral on Fed rate cuts):

    "My sense is that it’ll come down to two... It’s a very close call, with Fed officials mixed in terms of their disposition."

  • David Mericle, Goldman Sachs (Cautiously Optimistic on Fed's dot plot projections):

    "We expect the dots to show two cuts in 2024. A slight tick up in the longer-run or neutral rate."

  • Liz Ann Sonders, Charles Schwab (Neutral on market reaction to inflation and Fed guidance):

    "The bifurcation and dispersion within the market is very much tied to the yield backdrop... With the Fed being data dependent, markets risk knee-jerk reactions in bond rates due to inflation readings or guidance from the central bank on the path of its monetary policy."