The so-called “points” released on Wednesday as part of the US Federal Reserve’s policy decision showed that central bankers expect interest rates to be cut by 75 basis points in 2024. That's a significant increase from just 25 basis points that policymakers had expected three months ago.
Traditional markets had already been on a strong run since October on expectations of looser monetary policy and continued to rise on the news: all three major U.S. stock indexes rose more than 1% and the Dow Jones Industrial Average broke above for the first time ever 37,000 mark. Stocks are higher again on Thursday, albeit more modestly.
The bond market rally was even bigger, with the two-year U.S. Treasury yield falling about 40 basis points since the news to 4.32%, its lowest level since May. With the current Fed Funds interest rate or federal funds rate at 5.25% to 5.5%, a two-year 4.32% indicates significant belief that significant interest rate cuts are imminent.
In fact, the CME FedWatch tool now shows a 21 percent chance of a 25 basis point Fed rate cut as early as January and an 84 percent chance of one or more rate cuts by March.
Looking at other interest rate-sensitive markets, the US dollar index is down about 2% since Wednesday's Fed news and gold is up 2.5% – both of which suggest that TradFi is fully buying the rate cut story for now accepted.
The Fed's dovish signal also boosted the price of Bitcoin (BTC), which has been trying to recover this week from Sunday night's “flash crash” that saw prices plunge more than 5% in minutes. At $43,200, Bitcoin is only about 1% below its pre-crash price at press time.
While the Fed's median forecast for 2024 calls for rate cuts of 75 basis points, markets have priced in almost 150 basis points. Needless to say, even the Fed's more modest expectation would require a significant slowdown in the economy and/or inflation.
Claims of an impending recession have been popular this year, but the data continues to say otherwise. Annualized gross domestic product growth was a whopping 5.2% in the third quarter – the fastest pace since the fourth quarter of 2021, when significant government Covid stimulus measures were still rippling through the economy. And just this morning there was more good news, with a sharp decline in weekly initial jobless claims to their lowest level in two months and an unexpected rise in retail sales for November.
As for inflation, while it has fallen significantly from near double-digit levels in 2022 and stands at 3.1% based on the latest Consumer Price Index (CPI), it is still well above the Fed's 2% target. Core inflation – which typically attracts more attention from central bank policymakers – has remained more stubborn in its decline, remaining at 4% in the latest report.
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