Futures markets are buzzing, and all eyes are on the Federal Reserve. With a 93.3% chance of cutting interest rates by September, traders are all in on betting for a quarter percentage point reduction. Some hopefuls even see potential for a half-point cut, with a 6.7% probability. The CME FedWatch Tool has truly become a crystal ball for investor sentiments.
The recent CPI report for June turned the tide. It showcased a 0.1% decline in prices compared to the previous month, dropping the annual inflation rate to 3%—a three-year low. This encouraging data has investors doubling down on their rate cut expectations. With inflation seemingly under control, the market is more confident than ever that the Fed will pull the trigger on rate cuts.
But the story doesn’t end with data. Jerome Powell, our ever-watchful Fed Chair, made it clear: the Federal Reserve won’t wait for inflation to touch the elusive 2% target before cutting rates. Powell emphasized the delayed effects of tightening measures and the need for “greater confidence” that inflation will trend back to the 2% benchmark. His reassurances have only poured more gasoline on the flames of market anticipation.
At the June FOMC meeting, contrary to earlier hopes, the Federal Reserve kept interest rates untouched and revised its guidance to signal only one 25 basis point cut in 2024. The Summary of Economic Projections (SEP) underscored that inflation is expected to stay elevated over the next two years more than initially projected in March. The median FOMC member is now only bracing for one minor rate cut this year.
Before the June meeting, investors had grand illusions of substantial rate cuts. However, a robust U.S. economy and persistent inflation dissolved these dreams. This recalibration strengthened the USD and reduced interest rate differentials between emerging markets and the U.S.
Despite all this, emerging markets are proving to be resilient. Growth projections show a steady 4.3% for both this year and next. Additionally, inflation in these markets is anticipated to ease further, creating room for potential monetary policy relaxation.
Emerging market central banks are pulling all stops to manage currency volatility. Foreign exchange interventions and rate hikes have become tools of choice to mitigate adverse impacts on asset prices and funding gaps resulting from currency depreciations. In more dire scenarios, capital flow management measures are on the table but should accompany broader macroeconomic adjustments.
Traders are now 100% convinced of a rate cut by September, driven by bullish data from the latest CPI report. Analysts hold their breath for potential market volatility, citing unexpected Powell statements or surprise inflation spikes as wild cards that could jolt the market.
| Indicator | Probability (%) | Date |
|---|---|---|
| Odds of a Federal Reserve rate cut | 100% | 2024-07-16 |
| Federal Funds target range shift | 0.25 percentage point | September 2024 |
| Probability of a half percentage point rate cut | 6.7% | September 2024 |
| Consumer Price Index (CPI) trend | 0.1% decrease in June | June 2024 |
| Annual inflation rate drop | 3% (three-year low) | June 2024 |
| Probability of rate cut in September | 93.3% | N/A |
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