FED HOLDS RATES AT 5.25%-5.50% IN JULY MEET
It was called the worst kept secret that, the Fed would not cut rates in July. Even the CME Fedwatch has hinted at a certain rate cut in September but unlikely rate cut in the FOMC meeting on the last day of July. There were sections of the market that savoured an outside hope of a pre-emptive rate cut in July itself. There were reasons for that view. The US CPI inflation for June 2024 had fallen sharply by 30 bps to 3.0% while for the month of June, the PCE inflation (based on personal consumption expenditure) had also fallen by 10 bps to 2.5%. Markets were wondering; if that was not a confirmation of falling inflation, then what is? However, the Fed has been playing it safe, and considering the robust GDP numbers, it can afford to play safe. After all, contrary to market apprehensions, the hard landing has been avoided. The first advance estimate of Q2-2024 GDP growth has doubled sequentially from 1.4% to 2.8%. So, action shifts to September.
JEROME POWELL WARNS AGAINST TOO MUCH OPTIMISM IN 2024
In his post policy statement, Jerome Powell almost hinted that this may be the last policy statement in which the rates were held flat. In sync with the expectations of the CME Fedwatch, Jerome Powell also confirmed that one rate in September was on the cards. However, looking ahead, Powell has cautioned against too much optimism about the second rate cut also happening in 2024. In fact, prior to the policy statement, the CME Fedwatch had assigned a probability of more than 95% that the second rate cut would happen in December 2024. Powell underlined that while one rate cut was on the cards, two rate cuts in 2024 would be too optimistic. Instead, the Fed may prefer to back-end the rate cuts and be more aggressive in 2025, armed with more data points. Clearly, Powell does not want a situation when the Fed goes aggressive on rate cuts and subsequently has to adopt course correction. The macro consequences of such a move would be quite prohibitive.
KEY SIGNALS FROM THE JULY 2024 FED STATEMENT
The tone of the Fed statement in July also continued to be very cautious. However, Powell himself admitted that there were elaborate discussion on the timing and quantum of rate cut going ahead. The first rate cut looks quite likely in September 2024, although future rate cuts would be entirely data dependent. Here are some of the signals we gathered from the Fed Statement on July 31, 2024.
To sum it up, September rate cut looks highly probable now. However, the markets must also be prepared for the fact that the Fed officials will proceed carefully, despite signs that inflation is weakening. The Fed would have to be fully convinced that the time is ripe. We could still see the first rate cut in September, but beyond that, the trajectory is unclear.
CME FEDWATCH STILL CONVINCED OF 2 RATE CUTS IN 2024
One way to look at the Fed outlook from a market perspective is to evaluate the CME Fedwatch. The CME Fedwatch captures the probabilities of rate moves at each upcoming Fed meet, based on the implied probabilities of Fed Futures trading. We have considered available data up to September 2025 Fed meeting. The million dollar question is whether so much optimism in the CME Fedwatch is justified? We will get the answers soon.
Fed Meet | 275-300 | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 |
Sep-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 12.5% | 87.5% |
Nov-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 8.9% | 66.1% | 25.0% |
Dec-24 | Nil | Nil | Nil | Nil | Nil | 0.1% | 10.0% | 64.6% | 25.3% | Nil |
Jan-25 | Nil | Nil | Nil | Nil | 0.1% | 8.0%% | 53.5% | 33.3% | 5.1% | Nil |
Mar-25 | Nil | Nil | Nil | 0.2% | 8.1% | 48.9% | 35.0% | 7.5% | 0.4% | Nil |
Apr-25 | Nil | Nil | 0.1% | 5.3% | 34.7% | 39.8% | 17.1% | 2.9% | 0.1% | Nil |
Jun-25 | Nil | 0.1% | 3.9% | 26.7% | 38.4% | 23.2% | 6.7% | 0.9% | Nil | Nil |
Jul-25 | Nil | 1.9% | 14.7% | 32.2% | 31.3% | 15.4% | 4.0% | 0.5% | Nil | Nil |
Sep-25 | 1.6% | 12.8% | 29.7% | 31.4% | 17.7% | 5.6% | 1.0% | 0.1% | Nil | Nil |
Data source: CME Fedwatch
The CME Fedwatch has been broken up into 3 milestones; December 2024, April 2025, and September 2025. The probabilities of rate cuts and the eventual rates at each of these milestone has been evaluated. Here are our quick inferences.
For now, the CME Fedwatch tends to be very optimistic that the Fed would be aggressive in rate cuts. However, that is now really borne out by the statements made by Fed. In the past, it is usually the Fed officials who had the last word and the CME Fedwatch had to adjust its probabilities to the Fed view. It remains to be seen how it plays out this time around.
FED THEME – RATE CUTS WILL BE DICTATED BY FED INTERPRETATION OF DATA
For now, let us just forget about the different expectations indicated by the Fed and the CME Fedwatch. The CME Fedwatch certainly appears to be a lot more aggressive than what the language of the Fed has been indicating. However, the theme is that the decisions will be based on the macro data flows and, more importantly, by how the Fed interprets these data flows. Here is what we read from the Fed statement on July 31, 2024.
However, the bottom line is that the macro data points between now and mid-September will still carry a lot of weight in the final Fed decision to cut rates in September 2024.
HOW WILL RBI INTERPRET JULY 2024 FED STATEMENT
RBI implemented its last rate hike in February 2023 and kept status quo since. In recent months, the RBI was waiting for the election outcome and the presentation of the full budget. Now, all that is done. However, food inflation is still too high and the RBI may not be too keen to cut rates till food inflation is effectively tamed. The above average rainfall in July is likely to help tame food prices. RBI is unlikely to touch rates in the August meet and may prefer to wait for the Fed action in September. The crescendo for a rate cut is building up in India too, and the RBI may have to oblige sooner, rather than later!
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