Market expectations for the Fed funds rate
Source: Bloomberg Finance, L.P. as of May 11, 2023.
- April inflation data released this week was generally viewed by the markets as another step in the right direction. Consumer price index (CPI) data were in line with market expectations as pricing pressures continued their gradual decline for a tenth consecutive month.
- Perhaps most importantly, CPI data have shown enough progress in recent months to likely allow the Fed to pause following 500 basis points in rate hikes over the past cycle.
- While the market has long expected a Fed pause in May, expectations for rate cuts in 2H 2023 have grown. As the chart shows, market-based expectations for rate cuts have risen from about three cuts as of March 31 (black line) to more than four cuts (orange line) today.1
- Against this backdrop, investor and policymaker expectations appear to be at odds. Investor expectations are driven by softening economic data and ongoing regional bank stress. For their part, however, policymakers remain steadfast in their commitment to bringing inflation back in line with the Fed’s 2% objective (from 4.9% today).
- In light of the notable divide between investors and policymakers, markets remain particularly vulnerable to further bouts of volatility.