Cloudy Rate Outlook Invites Volatility

Cloudy Rate Outlook Invites Volatility
Provided by Rita Wilczek

I can't remember the last time there was such a wide divergence in the outlook for short-term interest rates. But some confusion is to be expected when the Federal Reserve primes the markets for lower rates but provides few details.

At its December 2023 policy meeting, the Fed communicated it would become more “accommodative” with three rate cuts possible in 2024. The markets cheered the news. But at its January 2024 meeting, Fed Chair Jerome Powell cautioned that they are not ready to start cutting yet.^1,2

Powell then appeared on “60 Minutes” to help clarify the Fed’s stance. He said the Fed will move carefully this year–perhaps at a rate slower than markets expect.³

For example, CNBC surveyed 25 economists and market strategists, and the group said it expects three rate cuts in 2024, with the first coming later this year. That’s consistent with the Fed. However, as the table below shows, other market participants see six rate reductions, with the first coming in May.^4,5

Here’s my forecast: cloudy with a chance of market volatility.

Long ago, I learned that it’s best to stay out of the prediction business and focus on the here and now. When short-term interest rates do change, I anticipate there will be plenty of time to make any necessary adjustments.

Trying to make sense of the various outlooks can be downright maddening when the Fed is being vague. So, if you have any questions, please reach out.

1. CNBC.com, January 31, 2024. “Fed Chair Jerome Poweel says a March rate cut is not likely.”
2. CNBC.com, December 13, 2023. “Fed holds rates steady, indicates three cuts coming in 2024.”
3. CNBC.com, February 4, 2024. “Powell insists the Fed will move carefully on rate cuts, with probably fewer than the market expects”
4. CNBC.com, January 30, 2024. “The Fed will cut rates fewer times and start them later than market hopes, according to CNBC Fed Survey.”
5. CMEGroup.com, January 31, 2024