Will the Fed cut rates in December?Contributor Alex Dryden
After nine rate hikes between December 2015 and December 2018, the Federal Reserve (Fed) has conducted a dramatic U-turn in 2019, cutting rates three times in three consecutive meetings. Despite this relatively aggressive rate cutting cycle, the Fed has been keen to stop easing policy sooner rather than later. Investors seem to have received the message and as long as economic data remains stable, it seems unlikely the Fed will ease policy in the near future.
Since the start of this rate cutting cycle in July, Fed officials have emphasized that this was a set of temporary cuts, required to help mitigate short-term headwinds and not the start of a prolonged easing cycle. However, bringing a rate cutting cycle to a close is no simple task. The financial market boost provided by cutting rates is addictive and it can be challenging for authorities to effectively wean market participants off this potent stimulus. At the last Fed meeting at the end of October, Fed Chair Jay Powell struck a balanced tone, emphasizing that “the current stance of monetary policy remains appropriate,” a clear signal to investors to temper their expectations for further easing.
This week’s chart suggests that the Fed Chair has been successful in lowering market expectations of future Fed cuts. For example, the market probability of a rate cut in December has reduced from 32% to just 11%. For investors peering into 2020, it is likely that U.S. monetary policy will remain on hold for the time being; however, the Fed remains data dependent and any deterioration in economic conditions may see the Fed restart their rate cutting cycle.
Market no longer expecting consecutive cuts
Probability assumes 25bp reduction in October meeting
Source: Bloomberg, J.P. Morgan Asset Management. Data are as of November 6, 2019.