MICHELLE BOWMAN HIGHLIGHTS KEY INFLATION RISKS
Apart from the Fed policy statement and the Fed minutes, one more thing that usually influences the direction of monetary policy is the speeches and pronouncements by the various Fed governors. In a recent speech delivered to the Pennsylvania Bankers Association, Fed governor, Michelle Bowman highlighted that there was a strong case for monetary policy to continue to be restrictive. In recent weeks, there has been speculation on when the Fed would commence rate cuts. The consensus, as of now, is that the Fed will start cutting rates in September and implement 2 rate cuts in 2024 and probably 2 more by the middle of 2025. Not much is really known beyond that as the probabilities can be very subjective. In her speech, governor Michelle Bowman underlined that despite the progress on inflation, the last mile was proving tougher than imagined. In fact, Bowman perceived some distinct risks to inflation in the coming months. These risks are summarized here.
Bowman also pointed out that wage growth has been at 4-5%, while a rate of 2% would be more conducive with inflation control. To sum up, the end of the road for inflation control may look tantalizing close, but that could be illusory. There could still be many a slip between the cup and the lip.
RECAP – CME FEDWATCH FOR THE WEEK ENDED MAY 10, 2024
The week to May 10, 2024 was marked by the Fed policy statement, which remained consistent that inflation would be the sole driver of rate action. The CME Fedwatch was expecting 2 rate cuts in 2024 and 2 more by the first half of 2025, but the underlying assumption was that inflation would show genuine tapering.
Fed Meet | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 |
Jun-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 3.5% | 96.5% |
Jul-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 0.8% | 24.6% | 74.6% |
Sep-24 | Nil | Nil | Nil | Nil | Nil | Nil | 0.4% | 12.2% | 48.6% | 38.8% |
Nov-24 | Nil | Nil | Nil | Nil | Nil | 0.1% | 4.5% | 24.9% | 45.2% | 25.2% |
Dec-24 | Nil | Nil | Nil | Nil | 0.1% | 2.4% | 14.9% | 35.3% | 35.0% | 12.3% |
Jan-25 | Nil | Nil | Nil | Nil | 1.0% | 7.5% | 23.3% | 35.2% | 25.7% | 7.3% |
Mar-25 | Nil | Nil | Nil | 0.5% | 4.3% | 15.5% | 29.3% | 30.4% | 16.3% | 3.6% |
Apr-25 | Nil | Nil | 0.2% | 1.9% | 8.3% | 20.4% | 29.7% | 25.4% | 11.9% | 2.3% |
Jun-25 | Nil | 0.1% | 1.0% | 5.0% | 14.2% | 24.9% | 27.6% | 18.8% | 7.2% | 1.2% |
Jul-25 | Nil | 0.4% | 2.3% | 8.0% | 17.7% | 25.8% | 24.7% | 15.0% | 5.2% | 0.8% |
Data source: CME Fedwatch
There were 3 triggers in the week to May 10, 2024 with reference to CME Fedwatch.
Let us turn to the major triggers for the CME Fedwatch in the latest week to May 17, 2024, in terms of key macro data pronouncements.
CUT TO PRESENT: CME FEDWATCH IN WEEK TO MAY 17, 2024
The latest week to May 17, 2024 saw the CME Fedwatch continuing to presume just 2 rate cut in 2024; with rather volatile probabilities. However, the 10 bps lower CPI inflation did make the probabilities of CME Fedwatch slightly more optimistic.
Fed Meet | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 |
Jun-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 8.9% | 91.1% |
Jul-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 2.0% | 27.6% | 70.4% |
Sep-24 | Nil | Nil | Nil | Nil | Nil | Nil | 1.0% | 14.8% | 49.0% | 35.2% |
Nov-24 | Nil | Nil | Nil | Nil | Nil | 0.4% | 5.9% | 26.8% | 44.1% | 22.8% |
Dec-24 | Nil | Nil | Nil | Nil | 0.2% | 3.4% | 17.4% | 36.3% | 32.4% | 10.3% |
Jan-25 | Nil | Nil | Nil | 0.1% | 1.5% | 9.0% | 24.9% | 34.8% | 23.6% | 6.2% |
Mar-25 | Nil | Nil | Nil | 0.8% | 5.6% | 17.7% | 30.3% | 18.7% | 14.1% | 2.8% |
Apr-25 | Nil | Nil | 0.4% | 2.7% | 10.3% | 22.7% | 29.7% | 22.9% | 9.6% | 1.7% |
Jun-25 | Nil | 0.2% | 1.6% | 6.8% | 16.9% | 26.4% | 26.1% | 15.8% | 5.4% | 0.8% |
Jul-25 | 0.1% | 0.7% | 3.6% | 10.7% | 20.6% | 26.3% | 22.1% | 11.8% | 3.6% | 0.5% |
Data source: CME Fedwatch
There were 3 critical triggers in the latest week to May 17, 2024 with reference to the swings in the CME Fedwatch.
Let us finally turn to the outlook for interest rates in rest of 2024 and what the CME Fedwatch is indicating about the direction and the timing of rate cuts; if any.
TRIGGERS FOR CME FEDWATCH: NEXT WEEK TO MAY 24, 2024
There are 3 critical triggers to watch out for in the coming week to May 24, 2024 with reference to CME Fedwatch.
Let us finally turn to the outlook for interest rates in the year 2024 and what the CME Fedwatch is indicating about the direction and the timing of rate cuts; if any.
CME FEDWATCH PENCILS JUST TWO RATE CUTS IN 2024
There has been some interesting change in the latest week to May 17, 2024. As of the end of this week, the CME Fedwatch is pencilling in a 57% probability (up from 53% last week), that the Fed would cut rates by 50 bps in year 2024. This is higher than just one rate cut pencilled two weeks back. The first rate cut is most likely to happen in September, with one more rate cuts in November or in December. However, that would predicate on the willingness of the hawks inside the Fed to give up on the “higher for longer” safety net. As of date, there is no credible evidence that inflation was moving towards the target of 2%.
The hawks within the Fed believe that it is better to be safe than sorry, and hence the defensive approach. It is true that the inflation damage may be hard to undo, if rate cuts trigger inflation. The Fed has not given any guidance on the number of rate cuts, but the markets would be more than pleased if the first rate cut happens in September 2024. Till that time, it will continue to be a delicate balancing game!
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