The US president is demanding the US Fed cut rates immediately.
Meanwhile, the market is indicating no rate cut is expected until the May meeting.
But as always, the market's forward curve can change based on the unknown of what might be said and done over the coming days, weeks, and months.
Yes, I saw the headlines this past weekend about how the US president “demands Fed cuts rate immediately” and that “he understands monetary policy better than those charged with setting it[i]. It brings to mind when this president was a world-class virologist and smarter than the generals, hence the importance placed on a military invasion of Greenland. But if we put all this aside for a moment, what is the market saying about potential moves by the Federal Open Market Committee (FOMC, the Fed) in early 2025? In case you’ve forgotten, the next meeting is scheduled for this Tuesday and Wednesday (January 28 and 29), concluding with an official announcement on interest rates.
Heading into the last week of January, the Fed fund futures forward curve (say that fast 10 times) indicates the Fed should hold interest rates steady. Recall last time (December 18) the same forward curve indicated the FOMC was likely to cut the Fed fund rate by 25-basis points, which the Fed did. As of this writing, the spot January Fed fund futures contract (ZQF25) was priced at 95.67, putting the Fed fund rate at 4.33%. At the conclusion of its December meeting (again, December 18), the Fed fund target rate range was dropped to 4.25% to 4.50% from the previous 4.50% to 4.75%. Given the spot futures price is within that target range, the market is indicating the Fed will likely stand pat this month.
But what about further out? Here’s where things get interesting. Keep in mind this month’s decision was likely made well in advance, with the potential for change resting on things that might’ve happened since the end of the December meeting. A look at expected rates projected by the forward curve shows a drop outside the target range isn’t seen until the May futures contract (ZQK25) priced near 95.79, putting the expected rate at 4.21. What this tells us, at least as of this writing, is the market does not expect a rate change until the May meeting (May 6 and 7).
But as is the case with any forward curve for any market, the Fed fund curve is subject to change based on the unknown of what might be said and/or done in the future. It is well known the US president wants lower interest rates, and he has said in the past he is a fan of negative interest rates[ii]. That doesn’t usually end well, but again, he’s the expert on all things, including monetary policy.
That has to be demanding.
