US Traders Bet Federal Reserve Will Hold Interest Rates Steady in 2024

US traders bet Fed won't cut rates in 2023 despite earlier expectations, as robust economic data and hawkish policymakers shift market sentiment, with implications for the US economy and financial markets.

Bijay Laxmi
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US Traders Bet Federal Reserve Will Hold Interest Rates Steady in 2023

US Traders Bet Federal Reserve Will Hold Interest Rates Steady in 2024

US traders are betting that the Federal Reserve will not cut interest rates in 2024, despite earlier market expectations of multiple rate cuts. In January, markets were excited about the prospect of an early rate cut, but by early April, investors were wondering if the full three cuts they had expected would materialize. However, the Federal Reserve has since leaned into backpedaling, with Chair Jerome Powell stating that recent data has not given them greater confidence and indicates that it will likely take longer than expected to achieve that confidence.

The shift in market sentiment is driven by robust US economic data and hawkish statements from policymakers, which were previously considered unlikely. Traders now anticipate the Fed's potential interest rate hike, a reversal from the earlier view that a rate cut was probable. Inflation, exchange rates, and the economy shape the policy decisions of central banks, and the attitudes and words of central bank officials influence the actions of market traders.

Despite concerns over sticky inflation, the US is expected to see stronger GDP growth of 2.7% in 2024 compared to 1.5% in Australia. However, the US Fed is likely to delay rate cuts until the second half of 2024, while other central banks like the Bank of Canada and European Central Bank are expected to cut rates in June. The Reserve Bank of Australia is also expected to start cutting rates, potentially in September or November.

The housing market is bearing the brunt of the Fed's high interest rates, with home buyers and sellers facing substantial pressure. Economists warn that if oil prices rise further due to tensions in the Middle East, it could lead to a significant increase in inflation, making it harder for the Fed to cut rates. Additionally, business activity has slowed, with both the services and manufacturing sectors underperforming expectations, and new home sales have jumped as people look for alternatives to the tight housing market.

Why this matters: The Federal Reserve's decision to hold interest rates steady in 2024 has significant implications for the US economy and financial markets. The shift in market expectations highlights the importance of closely monitoring economic data and central bank communications for investors and traders.

According to veteran investor Howard Marks, the current federal funds target rate of 5.25% to 5.5% is an "emergency measure designed to cool off the economy and inflation," and he believes that once the Fed declares victory against inflation, rates will be set at a moderate and sustainable level, likely in the threes. Marks argues that the U.S. economy is doing well and does not require further stimulus, and that the new higher-rate environment should see credit play a more important role in investors' portfolios.

Key Takeaways

  • US traders bet Fed will not cut rates in 2024, contrary to earlier expectations.
  • Robust US data and hawkish Fed statements drive shift in market sentiment.
  • US GDP expected to grow 2.7% in 2024 vs. 1.5% in Australia, but Fed to delay rate cuts.
  • Housing market bears brunt of high rates, oil price rise could worsen inflation.
  • Veteran investor Marks says Fed's 5.25-5.5% rate is "emergency measure", expects moderate level.