Near-Term Fed Rate Cut Looks Less Likely

Weekly Economic Snapshot:

Near-Term Fed Rate Cut Looks Less Likely, But Healthy Economy Seen Ahead

Recently, the Federal Reserve's expected rate cut in March has become less likely. The CME Fed Watch tool shows the chance of a March rate cut fell. It dropped from about 75% a month ago to 40% now.

This repricing comes after the Fed raised rates seven times in 2022. The Fed also signaled that more hikes are likely to bring down inflation.  

The Fed, however, seems to have backed off on more rate hikes. Some positive signs for the economy have also led traders to adjust their views.

Fourth quarter GDP growth is forecast to come in at a decent 2% annualized pace in data out this week. While slower than the third quarter, this still indicates economic resilience.

Earnings results so far have also not been disastrous. Banks benefit from higher rates.

Overall, markets seem to be lowering expectations for Fed easing. But, this has not materially dampened the positive outlook for corporate profits, stocks, and the broader economy.

This should ease pressure on Fed Chair Jerome Powell at upcoming policy meetings.

If a March rate cut was still seen as certain, Powell would have had more work. He would have had to convince markets that they should keep raising rates to lower inflation. Now he has more latitude.

For stocks, the economic trajectory matters more than rates themselves currently. Growth is ongoing. New highs could still come without a dovish Fed shift soon.

In sum, markets now doubt a sudden policy change. But, the bigger picture views of the economy and markets are mostly positive. The Fed’s inflation fight continues but a soft landing appears achievable.