When will the Fed start its first interest rate cut? – Last Minute Economy News

While inflation slows down in many countries after major central banks increased interest rates to historically high levels as part of the fight against inflation, which reached record levels after the Covid-19 pandemic, the effect of pricing on when the central banks of the said country will start reducing interest rates on the direction of the markets comes to the fore.

While the pricing that the Fed may start reducing interest rates later than the central banks of developed countries is getting stronger day by day, it is estimated in the money markets that the European Central Bank (ECB) will make the first interest rate cut in June with an 86 percent chance, and the Bank of England (BoE) will make the first interest rate cut in August with an 84 percent chance. .

Although the Fed has kept the policy rate at 5.25-5.50 percent, the highest level of the last 23 years, since July 2023, as part of the fight against inflation, the recently announced data in the USA points to the strong stance in economic activity. While this situation is reflected in the pricing in the money markets, the possibility of the bank’s first interest rate cut is being postponed day by day.

EXCEEDING EXPECTATIONS FOR FOUR MONTHS

While the Consumer Price Index (CPI) announced in the USA last week exceeded expectations with an annual increase of 3.5 percent in March, the data in question was above expectations for the fourth consecutive month.

According to the employment report data in March, non-agricultural employment in the USA exceeded the expectations with 303 thousand people, and the unemployment rate decreased from 3.9 percent to 3.8 percent, indicating that the tight stance in the labor market continued.

Finally, the retail sales data announced yesterday in the country increased by 0.7 percent on a monthly basis in March, above expectations, which was effective in weakening the predictions that the Fed would start reducing interest rates in July.

While it was priced at the beginning of the year that the Fed would make its first interest rate cut in March with an 85 percent probability, following strong macroeconomic data, the probability of the bank starting to cut interest rates currently points to the September meeting with a 71 percent chance.

With these developments, the dollar index rose to 106.4 and tested its highest level since November 2023, while a sell-off trend is observed in the bond markets. After the US 10-year bond interest rose to 4.67 percent, reaching its highest level since November 2023, it is currently at 4.65 percent.

Analysts stated that the data indicating the strong stance in the economy was supported by the hawkish-toned guidance of the Fed officials, and reported that a total interest rate cut of 50 basis points was priced in the money markets this year.

In particular, Minneapolis Fed President Neel Kashkari’s warning that interest rate cuts may not occur this year unless further progress is made in inflation was effective in making investors cautious, while Richmond Fed President Thomas Barkin said that he was optimistic that keeping interest rates a little restrictive could return inflation to the target, and that the bank was willing to cut interest rates. He noted that it would be “wise” not to rush.

While possible signals regarding the bank’s future policies will be in the focus of investors with the verbal guidance given by Fed Chairman Jerome Powell today, Powell’s statements are expected to increase volatility in asset prices.

‘DOT PLOT’ PREDICTIONS

While there were significant changes in the projections in March compared to the December estimates, the growth expectation of the USA this year increased from 1.4 percent to 2.1 percent, and the predictions for the unemployment rate decreased from 4.1 percent to 4 percent.

While inflation was estimated to be 2.4 percent for 2024 in the December and March projections, the year-end forecast for core inflation increased to 2.6 percent at the end of the year in March.

The median expectations of Fed officials regarding the year-end policy rate remained unchanged at 4.6 percent.

Despite these projections, as the recently announced macroeconomic data point to strong activity in the US economy, the possibility of a total of 2 interest rate cuts by the end of the year is gaining ground in the pricing in money markets.

Analysts noted that macroeconomic data and verbal guidance from Fed officials continue to remain in the focus of investors.