Fed Rate Cut Expectations

Investors are now expecting fewer rate cuts than earlier forecasted due to the Fed's hawkish guidance this week, signaling the end of rate cuts may be near.

Analysts from Macquarie noted a shift towards a more hawkish market pricing, predicting just one more 25 basis point cut, which they anticipate occurring in March or May 2025. This comes after the Federal Open Market Committee lowered its benchmark rate by 25 basis points to a range of 4.25% to 4.5% during its December meeting.

The December cut was paired with hawkish forward guidance, indicating a reduced projection for rate cuts in 2025, adjusted from 100 basis points in September to 50 basis points. The long-run dot also saw an increase to 3.0%, marking the fourth consecutive quarterly rise.

The analysts highlighted fresh inflation concerns as the reason for this hawkish shift, noting that now 15 participants anticipate risks to the core PCE projection are weighted to the upside, up from just 3 in September.

Macquarie concludes that the Fed may be nearing the end of its rate-cutting cycle, with their baseline expectation for the trough rate being in the 4.0 to 4.25% range by March or May.