Traders Unconvinced by Powell’s Deterrence: Expectations of Six Rate Cuts, Timing Discrepancy Raise Concerns

4 February 2024 - 1109 views

Despite Chairman Jerome Powell’s attempt to discourage traders from expecting as many as six rate cuts this year, traders remain unconvinced. Fed funds futures indicate that the central bank will likely lower rates by six quarter-point increments by December. However, traders did adjust their expectations on the timing of the first rate cut, pushing it to May instead of March. This discrepancy in expectations could lead to a repricing in markets, with potential downside risk to equity markets and a possible downgrade in corporate earnings estimates.

[Inflationary Scenario]
[Significance: Medium]

1. Traders disregarded Fed Chairman Jerome Powell’s attempt to push back against expectations of multiple rate cuts, as futures continue to indicate six cuts by December.
2. Bond yields declined for a fourth straight session as investors anticipated lower inflation and economic weakness.
3. Despite concerns about economic distress, all three major US stock indexes closed higher.
4. Traders believe that the central bank will need to lower rates due to falling inflation, leading to expectations of more than the three cuts already penciled in for 2024.
5. Some analysts believe that the market is discounting Powell’s statements and may be more sensitive to weaknesses in the economy like the labor market or banking sector.