MacroResearchBoard

The Elusive Fed Rate-Cutting Cycle: Some Good News, Some Bad News – June 17, 2024

A just-published report updated our view on Fed policy subsequent to the latest FOMC meeting. The Fed has been waiting for some milder inflation data to support its plans to reduce the policy rate this year. The soft core CPI print in the May report provided some respite after a string of strong inflation reports in the prior months.

Fed Chair Powell’s measured tone on inflation at the FOMC press conference, and the “less dovish” new dot plot indicate that the pickup in inflation in Q1 significantly dented the Fed’s confidence in its benign inflation outlook. Still, the Fed remains dovish and wants to cut rates.

Ultimately, we expect that inflation will not repeat May’s performance over the rest of the year: inflation will remain sticky and be well above target by year-end and beyond. Investors should also keep an eye on the ongoing rise in the Fed’s longer-run policy rate estimate which would imply upside for long-term bond yields even if the Fed were to cut the policy rate ahead.

Net: the Fed may well lower rates once or twice this year, but sticky inflation will keep the cutting cycle a lot shorter than what is currently discounted. We remain underweight bonds within a multi-asset portfolio.