Markets Now Price In Federal Reserve Rate Cut in July

After the Federal Reserve’s 10th consecutive rate increase last week, comments from Chairman Jerome Powell, and the central bank dropping language that “some additional policy firming may be appropriate,” the markets now see a 31% chance of a rate cut in July.

As expected, the Federal Reserve hiked interest rates by 25 basis points last week, bringing the benchmark rate for U.S. borrowing to 5.25% from 5.00%. This is the Fed’s 10th hike in 14 months to take interest rates up from near zero in March 2022. This is also the highest level in 16 years.

Chairman Jerome Powell said at a news conference on Wednesday that “a decision on a pause was not made today,” but he did say that the revised language in the statement about future policy firming was “meaningful.”

The market was disappointed after Fed Chair Jerome Powell ruled out a rate cut since he did not expect inflation to fall quickly enough, but markets did pick up some positive signs this time as the central bank appeared to have softened its tone on future rate hikes.

“In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed said in a statement.

According to the CME FedWatch tool, markets saw an 85% chance of the Federal Reserve holding rates at their current level in June, and the probability of a 25 basis point cut at the July meeting is around 31%.

Meanwhile, the base case showed three 25 basis point rate cuts in 2023 with the first cut to begin in September.

However, the release of the crucial U.S. Consumer Price Index (CPI) on Wednesday, the most well-known gauge of inflation, might completely change the dynamics surrounding the market’s pricing of the next Fed interest rates move.