March Rate Cut Expectations
February 1, 2024
As expected, Powell used some of yesterday’s press conference to push back on March rate cut expectations. Market based probability of a March cut fell to ~35% just after his comments, but are back above 40% this morning. Expectations for a March rate cut are based on the annualized rate for core PCE (from December) dropping to +1.9% over the last six months and +1.5% over the last 3 months. The Fed prefers core PCE to core CPI, but wont ignore CPI based inflation, which is running at a faster pace. The December CPI report had the annualized rate of core inflation running at 3.21% over the last 6 months and 3.33% over the last 3 months. Yesterday, Powell said ‘we want to see more good data. It’s not that we’re looking for better data.’ This means that January CPI due on 2/13 will likely be the deciding factor for a March rate cut. We continue to expect the first cut will come in June with five subsequent rate cuts through the year. Repricing rate expectations until June may generate some downside in equity markets that we’d first consider a buying opportunity. To us, the timing of rate cuts is not as important as the overall trend of disinflation. Once the annualized rate of core CPI falls below 3%, we’d expect a gradual return of the ‘Fed put,’ which tends to put a floor under equity markets.