Likely != automatic though, and everyone seems to be assuming it’s automatic.
From Powell’s presser on the 31st:
But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain. I want to assure the American people that we are fully committed to returning
inflation to our 2 percent goal. Restoring price stability is essential to achieve a sustained period
of strong labor market conditions that benefit all.
We believe that our policy rate is likely at its peak for this tightening cycle and that, if the
economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy
restraint at some point this year. But the economy has surprised forecasters in many ways since
the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. The
economic outlook is uncertain, and we remain highly attentive to inflation risks. We are
prepared to maintain the current target range for the federal funds rate for longer, if appropriate.
The Committee does not expect it will be appropriate to reduce the target range
until it has gained greater confidence that inflation is moving sustainably toward 2 percent. We
will continue to make our decisions meeting by meeting.
So, overall, I think people do believe, and as you know, the median participant wrote down three rate cuts this year. But I think to get to that place where we feel comfortable starting the process, we need
some confirmation that inflation is, in fact, coming down sustainably to 2 percent.
What’s your reference for the idea that it’s just assumed that we’re automatically going to have several rate cuts this year? If the inflation metrics do not continue on the trend that they are on, then they won’t cut rates. If they do, then they will.
Yeah I was looking at FedWatch, which seems reasonable - though maybe with the latest data it should drop further (I think it was 38% last night). But hearing people talk, it sounds like rate cuts are just assumed. People in finance at the poker table, retail investors online, people buying houses, realtors, etc.
Well, if I’m reading this right then the market is assuming like 97%+ chance of at least a 50bps drop between now and EOY. So a pretty reasonable general casual statement.
Yeah 97% seems high to me. Inflation went up in the last report, job growth just doubled estimates, hourly earnings increased 0.6%, and unemployment remains low. If that trend continues between now and May, then IMO that 0.0% chance of an increase is laughable and the likelihood of cuts is extremely low.
Perhaps a good way to frame this is that the media is treating it like three rate cuts this year are a slam dunk, not just in likelihood of happening, but also in obviousness of being correct. Like, anyone who thinks otherwise is an idiot. Some of the questions in Powell’s presser read as very condescending towards him, as if he was a moron to say they might not start cutting rates in May.
I think there’s a feedback loop between Wall Street and the media, some combination of access journalism and an undue respect for the wealthy and corporate-controlled media pushing a certain narrative, and I think that feedback loop is pushing rate cuts as the obvious thing to do and making a lot of people assume three rate cuts are just obviously going to happen.
This reminds me of last year when I was told I was an idiot for supporting rate hikes in the face of what happened to SVB, that rate hikes weren’t likely to cause an increase in unemployment, and that the FedWatch odds were insane.
We got 75 bps of rate hikes by the end of '23.
This next one is two days after the March '23 25 bps hike.
We got 50 bps more hikes in '23, then a pause and no cuts. Again, FedWatch markets waaayy off.
What’s the minimum I need to bet in that market? Maybe it’s actually pretty soft.
That chart makes it look like you can get 500:1 on rates being only a quarter point lower than they are right now which… also seems like a pretty +EV bet.
Not a totally crazy conspiracy theory to think it’s all hands on deck to juice the economy starting when normies start paying attention to the presidential race (and not a moment sooner).
Will lower rates help or hurt rental prices? Normally higher rates = less money = lower prices, but are high rates holding back home construction starts and holding back renters from joining the ranks of home buyers giving more market power to landlords?
