FED MACRO PROJECTIONS HINT AT HIGHER FOR LONGER
The Fed policy did not make any changes to its rates, but it reduced the guidance for rate cuts to just one rate cut in 2024. In addition, we now also have the June updates of key macros and these projections exactly match with the Fed guiding for just 1 rate cut in 2024. However, rate cuts could be more aggressive in 2025. The table below captures the gist of FOMC macro projections for next 3 years, as updated with June 2024 data.
Variable | CY-2024 | CY-2025 | CY-2026 | Longer run |
Change in real GDP (Jun-24) | 2.10 | 2.00 | 2.00 | 1.80 |
March-2024 projection | 2.10 | 2.00 | 2.00 | 1.80 |
Unemployment rate (Jun-24) | 4.00 | 4.20 | 4.10 | 4.20 |
March-2024 projection | 4.00 | 4.10 | 4.00 | 4.10 |
PCE inflation (Jun-24) | 2.60 | 2.30 | 2.00 | 2.00 |
March-2024 projection | 2.40 | 2.20 | 2.00 | 2.00 |
Core PCE inflation (Jun-24) | 2.80 | 2.30 | 2.00 | |
March-2024 projection | 2.60 | 2.20 | 2.00 | |
Federal funds rate (Jun-24) | 5.10 | 4.10 | 3.10 | 2.80 |
March-2024 projection | 4.60 | 3.60 | 3.10 | 2.60 |
Data Source: US Federal Reserve (CY refers to calendar year)
Here are some of the key takeaways from the FOMC long term projections updated as of the June 2024 quarter; with comparisons with the March 2024 projections.
The moral of the story is that the last mile inflation will remain sticky, so the rates are going to stay at higher levels for a longer period than originally envisaged.
RECAP – CME FEDWATCH FOR THE WEEK ENDED JUNE 07, 2024
Let us start with a recap of the week to June 07, 2024; and how the CME Fedwatch panned out during the week. The undertone of the members continues to be hawkish as the last mile inflation remains sticky. Hence, higher for longer, is the theme for now. Here is how the CME Fedwatch chart looked ahead of the FOMC meeting and the quarterly projections.
Fed Meet | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 | 550-575 |
Jun-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 2.24% | 97.8% | Nil |
Jul-24 | Nil | Nil | Nil | Nil | Nil | Nil | 0.1% | 8.1% | 91.8% | Nil |
Sep-24 | Nil | Nil | Nil | Nil | Nil | 0.1% | 3.8% | 46.6% | 49.5% | Nil |
Nov-24 | Nil | Nil | Nil | Nil | Nil | 1.1% | 15.9% | 47.4% | 35.6% | Nil |
Dec-24 | Nil | Nil | Nil | Nil | 0.7% | 10.2% | 35.3% | 40.1% | 13.7% | Nil |
Jan-25 | Nil | Nil | Nil | 0.3% | 4.9% | 21.3% | 37.4% | 28.4% | 7.6% | Nil |
Mar-25 | Nil | Nil | 0.2% | 2.7% | 13.6% | 29.8% | 32.7% | 17.4% | 3.6% | Nil |
Apr-25 | Nil | 0.1% | 1.1% | 6.5% | 19.3% | 30.8% | 27.3% | 12.6% | 2.3% | Nil |
Jun-25 | Nil | 0.6% | 4.0% | 13.4% | 25.5% | 28.9% | 19.4% | 7.1% | 1.1% | Nil |
Jul-25 | 0.3% | 1.9% | 7.6% | 18.0% | 26.8% | 25.3% | 14.7% | 4.8% | 0.7% | Nil |
Data source: CME Fedwatch
There were 3 critical triggers to watch out for in the week to June 07, 2024 with reference to CME Fedwatch.
For now, the last mile inflation is not giving clear signals. The CME Fedwatch has reconciled to the first rate cuts happening on in September; although it will still be an inflation game.
CUT TO PRESENT: CME FEDWATCH IN WEEK TO JUNE 14, 2024
The latest week to June 14, 2024 saw the CME Fedwatch continue to factor in 2 rate cut in 2024. However, this is despite the Fed now guiding for just one rate cut in 2024.
Fed Meet | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 | 550-575 |
Jul-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 10.3% | 89.7% | Nil |
Sep-24 | Nil | Nil | Nil | Nil | Nil | Nil | 6.6% | 61.1% | 32.3% | Nil |
Nov-24 | Nil | Nil | Nil | Nil | Nil | 2.6% | 28.2% | 49.7% | 19.5% | Nil |
Dec-24 | Nil | Nil | Nil | Nil | 2.1% | 23.2% | 45.5% | 25.4% | 3.8% | Nil |
Jan-25 | Nil | Nil | Nil | 1.3% | 14.7% | 36.6% | 33.5% | 12.5% | 1.5% | Nil |
Mar-25 | Nil | Nil | 0.9% | 10.5% | 29.7% | 34.4% | 19.1% | 5.0% | 0.5% | Nil |
Apr-25 | Nil | 0.4% | 5.4% | 19.6% | 31.9% | 27.1% | 12.4% | 2.8% | 0.3% | Nil |
Jun-25 | 0.3% | 3.6% | 14.4% | 27.4% | 28.9% | 17.8% | 6.3% | 1.2% | 0.1% | Nil |
Jul-25 | 1.7% | 8.0% | 19.7% | 28.0% | 24.4% | 13.1% | 4.2% | 0.7% | 0.1% | Nil |
Sep-25 | 7.2% | 16.0% | 25.4% | 25.5% | 16.7% | 7.0% | 1.8% | 0.3% | Nil | Nil |
Data source: CME Fedwatch
There were 3 critical triggers influencing the CME Fedwatch in the week to June 14, 2024; and all of them were very critical inputs.
Inflation is sticky in the last mile and rates are likely to be higher for longer. However, the CME Fedwatch is pencilling in aggressive rate cuts in 2025.
TRIGGERS FOR CME FEDWATCH: NEXT WEEK TO JUNE 21, 2024
It will be a truncated week in the US with June 19, 2024 being a holiday. There are 3 critical triggers to watch out for in the coming week to June 21, 2024 for CME Fedwatch.
There are no key data points or events next week, so the action shifts to what the members of the FOMC speak at various fora. Powell will have to face some tough question in front of the Congress since rate cuts have not happened as originally guided.
CME FEDWATCH EXPECTS CAUTIOUS 2024; AGGRESSIVE 2025
Based on the latest flows, how have the probabilities of rate cuts changed in the week. During the week, the big data announcements were the consumer inflation numbers for May, the Fed policy statement by the FOMC and the long term macro projections updated for the June 2024 quarter. Let us look at the hawkish and dovish standpoint.
At the end of the day, it will depend on whether the hawks within the Fed get the upper hand or the doves get the upper hand; but for now, the CME Fedwatch is being more realistic. A lot more clarity on the trajectory of rates will be there after the Fed chair, Jerome Powell deposes before the Congress in the coming days.
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