This is a core issue of great concern to global markets, and its changes directly affect global asset prices. The current situation can be summarized as: rate cuts are certain, but the timing and magnitude are full of variables, and the market is in a 'tug of war' with the Fed.
Here are analyses of several key aspects:
1. What are the current market expectations? (As of the end of May 2024)
According to data from CME's 'FedWatch' tool, the mainstream expectation in the market is:
· First rate cut time: The market generally bets on September 2024. The probability of another rate cut in November or December is also high.
· Expected rate cuts for the year: The market currently expects 1-2 rate cuts throughout 2024, each by 25 basis points. This is far lower than the market's expectation of 6-7 cuts at the beginning of the year.
2. Why are there rate cut expectations?
Rate cut expectations are not unfounded; they are primarily based on the following logic:
· Inflation has significantly decreased from its peak: The U.S. CPI year-on-year growth has dropped sharply from its peak of 9.1% in June 2022 to 3.4% in April 2024. Although it has not yet reached the 2% target, the worsening trend has been completely reversed.
· Signs of economic cooling: Recent employment market data (such as April non-farm employment figures, JOLTS job vacancies) show that the labor market is gradually balancing, and demand is no longer as overheated as before. Consumer spending and some economic indicators also show signs of weakness.
· Lagging effects of restrictive rates: The Fed has kept rates at 5.25%-5.50% for over a year, and this restrictive policy's suppression effect on the economy is gradually becoming apparent. The Fed needs to avoid 'over-tightening' that could lead to economic recession.
3. What is the Fed's official stance? ('Higher for Longer')
The Fed's rhetoric has been more cautious and 'hawkish' than the market expectations. Its core view is:
· Lack of confidence in further rate hikes, but patience is needed for rate cuts: Fed Chair Powell has repeatedly stated that the next step is 'unlikely to be a rate hike', but he also emphasized a lack of confidence in inflation falling back to the 2% target, thus requiring patience to maintain high rates for a longer time.
· Data-Dependent: The Fed has clearly stated that future rate decisions will be completely dependent on economic data, especially inflation and employment data. They need to see 'more months' of good inflation data to gain confidence to start rate cuts.
· Dot plot implications: The Fed's latest dot plot in March showed that officials expect to cut rates three times (75 basis points) this year. However, the new dot plot in June will be crucial and may be adjusted based on recent data.
4. What are the key factors and data affecting rate cut expectations?
Market expectations fluctuate daily with new data and need to focus on:
1. Inflation data (CPI and PCE): This is the most core indicator. Especially the core PCE price index, which is the Federal Reserve's preferred inflation indicator. Any readings above or below expectations will strongly disrupt the market.
2. Employment data (Non-Farm Payrolls - NFP): Focus on new job creation, unemployment rate, and average hourly wage growth. Wage growth is key to service inflation; if wage growth continues to slow, it will reinforce rate cut expectations.
3. Economic growth data (GDP): If the economy shows unexpected resilience, the Fed can be more patient; if the economy declines rapidly, a rate cut may come earlier.
4. Remarks from Fed officials: Any public comments from an FOMC voting member will be closely analyzed by the market to glean changes in internal consensus at the Fed.
5. What impact does it have on the market and investments?
Rate cut expectations directly affect almost all asset classes:
· Stock market: Rising rate cut expectations usually benefit the stock market, especially interest-sensitive growth stocks and tech stocks (the discount rate in valuation models decreases). Conversely, delays in expectations may trigger adjustments.
· Bond market: Rate cut expectations will lead to a decline in Treasury yields (bond prices increase). The shape of the yield curve will also change.
· Forex market: Rate cut expectations will weaken the dollar's attractiveness, potentially leading to a weaker dollar. Conversely, delaying rate cuts will support a stronger dollar.
· Gold: Gold is a non-interest-bearing asset, and a rate cut reduces the opportunity cost of holding gold, usually benefiting gold prices.
· Cryptocurrency: Assets like Bitcoin are often viewed as risk assets, more likely to be favored when liquidity expectations are loose.
Summary and Outlook
The current narrative about the Fed's rate cuts is:
The market is moving from extreme optimism at the beginning of the year (expecting rapid and significant rate cuts) towards a cautious position of the Fed (needing more evidence, with rate cuts happening later and slower) and compromise.
The future core focus lies in: Can inflation continue to decline steadily and unequivocally? Will the job market cool moderately or suddenly stall?
In simple terms:
· If inflation remains stubborn (above 3%) -> Rate cuts will be significantly delayed, possibly until 2025, and discussions of restarting rate hikes cannot be ruled out (very low probability).
· If inflation falls smoothly (close to 2.5%) -> The Fed may begin rate cuts around September to achieve a 'soft landing'.
· If economic data deteriorates sharply (unemployment rate rises significantly) -> The Fed may be forced to cut rates urgently, but this would mean the economy is likely already in recession.
It is recommended to continuously monitor the monthly released CPI and non-farm employment reports, as these are the most direct catalysts for market expectation changes.
