Fed Speakers and Fed Funds Futures Continue to Diverge... Who's Right?
One of the more interesting features of the market over recent weeks is the growing divide between the rhetoric from Federal Reserve members in speaking engagements and the pricing of contracts in a market known as the Fed Funds Futures.
The Fed Funds Futures shows where the market is betting the Fed will take policy decisions over coming months. Right now, this market is forecasting rate cuts starting at the March FOMC meeting and through the following five meetings, bringing the policy rate down 150 bps to around 4% by the end of 2024.
Contrast this with what we heard today from three different Fed speakers.
Federal Reserve Governor Bowman spoke at the South Carolina Bankers Association 2024 Community Bankers Conference, saying she was open to further hiking but thought that policy was sufficiently restrictive now.
She did note, It will eventually become appropriate to lower Fed"s policy rate, should inflation fall closer to 2%.
Raphael Bostic, President of the Federal Reserve Bank of Atlanta, noted that he thought it might be time to do a rate cut in Q3 of 2024. He also noted that Inflation and employment mandates are not yet in conflict.
The takeaway from this point is likely him suggesting that he will need to see the unemployment rate push materially higher before favoring an interest cut.
On the same day, we saw the NY Fed one-year inflation expectations data point fall to its lowest level in more than 3 years.
While Bostic and Bowman are considered to be slightly on the hawkish side of the center of gravity at the Fed, they have also generally been roughly in step with Chair Powell along the way. Their rhetoric is also similar to what we have been hearing from other Fed members over recent sessions: namely, that 2024 in no way is set to feature 5-6 rate cuts starting in a matter of 10 weeks.
The disparity is striking. However, one might speculate that the Fed has decided to use its communications to push back against market-based easing ahead of their cuts even if they do plan to cut in March.
One thing is for certain: 5.25% is too high in a world where the six-month annualized PCE inflation rate is 1.9% (below target), which is exactly what we saw a couple weeks ago. Given the rally we have been seeing in the stock market, it appears investors are betting with the Fed Funds Futures until they see a wrong note in the underlying data.