Fed Fund Futures Anticipated 7 Rate Cuts in 2024. There's Now a 32% Chance of 4.

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Today's bonus chart refocuses our attention on fundamental macroeconomics, comparing the 2-year Treasury yield with a 4-month lead against the Federal Funds rate. This comparison effectively cuts through the speculation about the Federal Reserve's intentions, reinforcing the message that rates are expected to remain high for an extended period.

At the beginning of the year, Fed Fund Futures anticipated as many as seven rate cuts. However, expectations have adjusted, with the probability of seeing four rate cuts by December now at 32%. A month ago, the odds for five rate cuts stood at 37%.

Data: CME Group

The backdrop of this financial landscape is marked by significant debt accumulation, which has artificially boosted GDP growth – a $2 trillion surge in public debt alongside record levels of credit card debt has propped up consumer spending, concealing a $1.5 trillion increase in GDP. Despite these underlying factors, the Federal Reserve is unlikely to take these details into account. In the eyes of the central bank, GDP growth is regarded positively, even if driven by debt accumulation, and job creation is seen as beneficial, notwithstanding the stagnation or decline in real wages.

The Federal Reserve finds itself in a challenging position: either appease the expectations of an eager market at the risk of fueling higher inflation or adhere to cautious rate increases, potentially hastening the real economy's decline. Regardless of the path chosen, small businesses and families are poised to bear the brunt of the impact, grappling with both inflation and rate hikes, all while the government's deficit is on track to balloon further. The people who make you ill cannot make you well; great job, Janet and Jay.

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