How December Fed minutes could shake up investors’ rate-cut expectations

Traders kicked off the new year by clinging to expectations for up to seven quarter-point rate cuts from the Federal Reserve this year, or more than twice as many as policymakers have telegraphed.

Those expectations have the potential to be impacted as the result of the minutes from the Fed’s Dec. 12-13 meeting, set for release at 2 p.m. Eastern on Wednesday, by revealing fresh insights into how officials have been thinking about the most likely path of inflation.

The stock market rallied into the end of last year on the Fed’s median forecast for three quarter-point rate cuts in 2024, which would take the fed-funds rate target down to around 4.6% from its current level between 5.25%-5.5%. Soon after the Fed’s meeting, however, prominent policymakers like New York Fed President John Williams began pushing back on expectations for lower borrowing costs, calling talks around such a move “premature.”

“We know that officials do expect at least three rate cuts this year,” said Lauren Henderson, an economist for Stifel, Nicolaus & Co. in Chicago. “If we see some more dovish sentiment come from Federal Reserve officials — and they are content with where inflation is and its decline from peak levels — it could solidify at least three rate cuts this year and increase expectations for even more.”

However, “if we hear Fed officials comment on still-elevated inflation, that could remove some urgency for rate cuts and the market might dial back on its expectations on the number of cuts for this year,” she said via phone.

Read: Here are 5 questions that investors should be asking as 2024 begins

On Tuesday, fed funds futures traders factored in an 89.3% likelihood of five to seven quarter-point cuts by year-end, but pulled back slightly on expectations for the first cut to arrive by March. Meanwhile, one-
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through 30-year Treasury yields
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were mostly higher as of the New York afternoon. Stocks
DJIA
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COMP
traded mostly lower.

As a result of the Fed’s last gathering in December, “the market felt empowered to escalate its rate-cut expectations further, seeing as the meeting had the effect of expanding the outer limits from five cuts beginning midyear to at least seven cuts beginning March,” said former Fed governor Larry Meyer and others at Monetary Policy Analytics in Washington. “Midyear onset still seems reasonable but the risk is earlier and deeper cuts.” 

See: Health of U.S. labor market looms large on markets’ radar this coming week