The bond market opened 2024 in anticipation of five to six Fed Funds rate cuts (25bp each); but was soon disabused of this notion and marked its expectations closer to the FED DOTs of three cuts.
The bond bulls, ever hopeful, expected the February and March CPI reports to push the Fed to take swift action; but this was not to be. The February CPI came in a bit higher than expectations, but a lot of hand waving discounted its value.
All eyes soon focused upon the March report, which was supposed to reverse the mood. Instead, both March Headline and Core came in above expectations, and worse still, the year-over-year (YOY) rose to 3.2% and 3.8% respectively.
As shown in Figure 1, listed FED Funds futures have pushed back any rate cuts to at best June (100 minus the price is the expected interest rate) and are now focused on July or August.
The problem is that these dates surround the Republican and Democratic Presidential Conventions, and thus would conflict with the Fed’s desire to stay out of politics.
With CPI still running well above the Fed’s 2.0% target, one must seriously consider the possibility of none, or only one rate cut, a situation the market has not priced.
Glossary:
Basis Points (bps): A common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.
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