The Fed fund futures forward curve is showing an expected rate cut by the US FOMC of 25-basis points Thursday afternoon.
There is growing chatter about how the expected rise in inflation following the US presidential election will do away with thoughts of continued rate cuts.
However, the president-elect is a fan of low interest rates, even negative rates, and has talked of putting himself in charge of making rate decisions.
The November 2-day meeting of the US Federal Open Market Committee (FOMC, the Fed) concludes Thursday afternoon. At that time, 14:00 (ET), Fed Chairman Jay Powell will announce the latest move on the Fed fund rate. Not surprisingly, the debate over this month’s meeting has been pushed off center stage by the US presidential election held this past Tuesday. The last couple days I’ve had a number of questions come in asking about what the Fed might do this month, with my standard answer being it hasn’t changed its short-term game plan, though the long-term strategy could be altered in ways thought unimaginable in the not-too-distant past that now seems an eternity ago.
Let’s start with what the market is telling us heading into today’s (Thursday, November 7, 2024) announcement. As I talked before the September announcement, I track the Fed fund futures (ZQX24) forward curve to get a read on what traders are thinking. Last time, the futures market was indicating a good chance for a 25-basis point cut and a less likely chance of a 50-basis point cut. When Chairman Powell took the stage it was to announce the latter, the Fed fund rate falling to a range of 4.75% to 5.0%.
A look at the forward curve heading into Thursday shows the November contract priced at 95.3625 equating to a Fed fund rate of 4.6375%. Again, at the end of the September meeting the rate was dropped to a range of 4.75% to 5.0% equating to a spot-month Fed fund futures price between 95.00 and 95.25. The bottom line is the market is again indicating a 25-basis point rate cut by the FOMC early this afternoon. Does this week’s activity, so far, change things? I don’t think it changes today’s outcome, but what about down the road as the flames of inflation are fanned once again by new tariffs and trade wars?
Wednesday I received a market newsletter via email that read, in part, “…your 2025 rate cuts went away to live with a nice farm family upstate”. While I appreciate the use of the familiar story parents tell their kids when a beloved family pet “moves away”, I don’t agree with the conclusion. Recall what the president-elect has said and done in the past. When the initial trade war was started on social media, and immediately followed by tariffs on key global trade partners while trade agreements were broken, the response from the US administration to the subsequent (and expected) early signs of inflation was the threat of job loss to anyone who dared mention using interest rate hikes to battle the coming but conflagration. Though thusly hamstrung, the FOMC did what it could, raising the rate by 1.0% from December 2017 through December 2018.
This time around, the president-elect has said he plans to change the way things are done. His idea is any decision on rates will be finalized by him, and him alone. In the past he has been a proponent of negative interest rates, so talk of the death of interest rate cuts to come may be an exaggeration (to paraphrase Mark Twain).
But that’s just my opinion, and as I’ve long said, the market doesn’t care what I (or any one individual) think. With that in mind, let’s take another look at what the forward curve is telling us. If we assume the Fed makes the expected 25-basis point Thursday afternoon, the range would be between 4.5% and 4.75% putting expected futures price between 95.25 and 95.50. The December contract is priced at 95.495 indicating the Fed could hold at unchanged when its December meeting comes to an end (Wednesday, December 11). However, the curve continues to angle up through 2025 telling us traders are still expecting rate cuts next year.
This opinion can change over time, though, as reality continues to sink in and executive orders are made.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
