Markets are now betting the Fed is going to make a mistake with rate cuts, BofA says
While prospects of a March rate cut have dimmed, investors still expect aggressive rate cuts this year.
“Markets are still pricing about six cuts over the course of this year. This suggests to us that they are pricing in a policy error.”
Jerome Powell probably wanted to reduce some investor bullishness with his comments about a March rate cut at the Fed’s January meeting. Instead, markets are now betting the Fed is going to make a mistake, according to Bank of America.
“Markets are pricing a policy mistake,” analysts wrote in a note Friday.
The Fed signaled this week that a March rate cut is unlikely, with Powell insisting there needs to be a continuation of “good data” to bring an end to the pause in interest rate hikes. But that didn’t dim investor optimism about cuts for the rest of the year.
“Powell’s strong statement about March lowered pricing of a March cut, but markets are still pricing about six cuts over the course of this year,” Bank of America analysts wrote. “This suggests to us that they are pricing in a policy error.”
Previously, central bank officials have said they foresee about three rate cuts in 2024. And yet, markets have continued expecting more, with some predicting as many as six cuts. Investors were also more optimistic about the timing of the cuts, hoping that the first cut would arrive early. The CME FedWatch Tool showed traders were wagering a 70% chance the Fed would pivot in March early last month.
The data now says traders place the odds that the Fed will hold rates steady in March at over 80%. But they still expect aggressive cutting in 2024 for a total of around 100 basis points.
“Going into the January meeting, we thought it was more important for the Fed to push back against market pricing of the speed of rate cuts rather than the timing of the first cut,” the analysts wrote. “Yet the Fed achieved the exact opposite.”
“If the Fed wants to cut rates at a quarterly pace, it has a lot of work to do in terms of moving market pricing, and it runs the risk of inducing meaningful financial tightening,” the analysts wrote.
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