FED MARCH 2024 MINUTES AND CPI INFLATION
For the US economy, it was a sort of lethal combination. The minute of the March FOMC meeting were released on April 10, 2024, the same day that the BLS also released its consumer inflation report for the month of March. Of course, the minutes pertain to the FOMC (Federal Open Markets Committee) held on March 19 and 20, 2024, culminating in the release of the Fed statement on March 20, 2024. The minutes published on April 10, 2024 were merely a recording of the key highlights of the Fed meeting held 21 days ago. However, the coincidence was not missed. The minutes were announced on the same day the consumer inflation also came in sharply higher at 3.5% for the month of March 2024.
Even before the minutes were announced, the markets had already been taken aback by the sharp spike in consumer inflation. For the month of March 2024, the consumer inflation came in 30 bps higher at 3.5%. That does away with any immediate hopes of rate cuts, irrespective of what the Fed minutes said or implied. One must look at the consumer inflation number from a slightly longer perspective. In January 2024, the consumer inflation was expected at 2.9%, but came in at 3.1%. February inflation edged up by 10 bps to 3.2%, while the March inflation spiked by 30 bps to 3.5%. As the Fed had apprehended, the inflation impact of the Red Sea crisis was proving to be a lot more intractable than imagined.
CIRCA FED MARCH MEET – OUR 6 KEY READINGS
It is interesting how much things can actually change in a short span of 3 weeks. When the Fed statement was made by Jerome Powell on March 20, 2024, the indication was that the Fed would still go ahead with 3 rate cuts in 2024. However, the statement was not too explicit about when the rate cuts would start, or what would be the timetable. Here are 6 key points we gathered from the Fed statement issued on March 20, 2024.
In a nutshell, the Mar-24 Fed statement did reiterate end of rate hikes and the possibility of 3 rate cuts in 2024. However, markets are increasingly sceptical about the second part.
FED MINUTES AND INFLATION MAKE CME FEDWATCH LESS DOVISH
The table below captures the rate cut probabilities over the next 10 Fed meetings, based on the implied probabilities in the Fed futures trading.
Fed Meet | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 |
May-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 4.1% | 95.9% |
Jun-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 0.7% | 19.1% | 80.2% |
Jul-24 | Nil | Nil | Nil | Nil | Nil | Nil | 0.2% | 6.4% | 38.1% | 55.3% |
Sep-24 | Nil | Nil | Nil | Nil | Nil | 0.1% | 3.0% | 20.7% | 45.8% | 30.4% |
Nov-24 | Nil | Nil | Nil | Nil | Nil | 0.8% | 7.4% | 26.9% | 41.9% | 23.0% |
Dec-24 | Nil | Nil | Nil | Nil | 0.4% | 4.4% | 17.8% | 34.6% | 31.8% | 11.0% |
Jan-25 | Nil | Nil | Nil | 0.2% | 1.8% | 8.9% | 23.6% | 33.7% | 24.7% | 7.1% |
Mar-25 | Nil | Nil | 0.1% | 0.9% | 5.1% | 15.7% | 28.2% | 29.5% | 16.6% | 3.9% |
Apr-25 | Nil | Nil | 0.3% | 2.1% | 8.0% | 19.2% | 28.7% | 26.0% | 13.0% | 2.7% |
Jun-25 | Nil | 0.1% | 4.0% | 4.6% | 12.7% | 23.2% | 27.6% | 20.5% | 8.6% | 1.6% |
Data source: CME Fedwatch
Is it true that the CME Fedwatch has turned less dovish post the Fed minutes and March consumer inflation announcement by the BLS? Here are some key takeaways.
Having seen the market impact, let us turn to what the minutes of the Fed meeting actually indicated.
READING BETWEEN THE LINES OF THE MARCH 2024 FED MINUTES
The minutes of the FOMC meet largely maintained its cautious stance on rates, even while reassuring the markets that rate cuts were still on the cards. Here is a quick dekko
Following the release of consumer inflation and the Fed minutes, traders in the fed funds futures market recalibrated their expectations. Now markets are pegging that the first rate cut would only happen in September 2024, with a higher probability of 2 rate cuts in 2024, instead of 3 rate cuts. The minutes did not betray any such commitment, but the CME Fedwatch has given sufficient indications. The only consensus in the minutes was that the situation warranted a cautious approach.
HOW WILL RBI INTERPRET THE FED MAR-24 MINUTES?
RBI effected its last rate hike in February 2023 and has since held rates static for the next 7 meetings, including the recent April RBI MPC meeting. India consumer inflation fell from 5.69% in December 2023 to 5.1% in January 2024 and further to 5.09% in February 2024. The March CPI inflation would be announced by MOSPI on April 12, 2024 and it is expected to come in below 5%. However, this could be partially attributed to the cut in petrol and diesel prices by ₹2/litre. The RBI finds itself in a sweet spot with GDP growth robust at over 8% in the first three quarters of FY24 and likely to edge past 8% for fiscal year FY24.
One thing is certain; rate hikes are now a thing of the past. However, there is a strong case for the RBI to cut rates. Firstly, repo rates at 6.5% are 135 bps above the pre-COVID interest rates. Secondly, if you look at the 10-year benchmark bond yields of 7.12%, it offers a real rate of over 2%; which is unsustainably high. While the Fed has not committed anything in the minutes, the CME Fedwatch is pegging the first rate cut only in September 2024. By then, India would have completed its election, government formation and full budget. That is enough time for the RBI to start worrying about monetary divergence risks.
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