Market Sentiment Indicates Less Than Two Fed Rate Cuts Expected in 2024

Current market sentiment suggests that the US Federal Reserve is likely to implement fewer than two interest rate cuts in 2024, according to Arindam Mandal, Portfolio Manager at Marcellus Investment Managers.

This marks a significant shift from earlier expectations, which had anticipated the Fed would lower its benchmark rates by up to 75 basis points next year.

The change in sentiment is driven by a series of hot inflation, retail sales, and labor market reports, as well as the potential for an oil price spike due to the conflict in the Middle East. Fed officials have indicated they can be patient and leave rates in the range of 5.25% to 5.5% indefinitely, with some experts even speculating that the next Fed move might be a rate hike.

Economists have upgraded their forecasts for US growth, spending, and employment, but also expect interest rates to remain higher for longer as above-target inflation persists. The median projection shows just two quarter-point cuts in 2024, down from previous expectations. Forecasters see GDP expanding by 2.4% on average in 2024, up from 2.2% in the previous survey, driven by stronger consumer spending and private investment.

Why this matters: The evolving market expectations and the challenges facing the Federal Reserve in its efforts to tame inflation have significant implications for the US economy and financial markets. Higher-for-longer interest rates could strain the balance sheets and debt-servicing capacity of households and businesses, potentially weakening the economic outlook.

Fed Chair Jerome Powell has indicated that "it's likely going to take longer than expected to gain the confidence needed to lower rates," dashing hopes for more than two cuts in 2024. Some economists are concerned there may be no rate cuts at all next year, as the enduring strength of the economy and labor market has reignited a debate about the restrictiveness of monetary policy.

Key Takeaways

• Fed likely to implement fewer than 2 rate cuts in 2024, down from earlier expectations.
• Sentiment shift driven by hot inflation, retail sales, and labor market reports.
• Economists upgrade US growth, spending, and employment forecasts, but expect higher rates.
• Higher-for-longer rates could strain household and business balance sheets.
• Fed Chair Powell says it may take longer to lower rates, sparking debate on policy restrictiveness.