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Rate cut expectations ramp up following Fed’s latest call

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Three interest rate cuts are now on the cards for the US Federal Reserve in 2024, while locally the Reserve Bank is now expected to begin cutting sooner.

The US Federal Reserve left interest rates on hold at its final meeting of the year on Wednesday (13 December), setting the stage for rate cuts next year both overseas and in Australia.

IG Australia market analyst Tony Sycamore said that the Australian interest rate market has now brought forward its expectations for the first 25-basis-point (bps) rate cut from the Reserve Bank of Australia (RBA) in 2024 from November to June.

“A second 25 bps rate cut is now fully priced by November,” he added.

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AMP chief economist Shane Oliver recently opined that interest rates have “likely peaked”, but acknowledged that the risk is still on the upside in Australia.

“We think they’re going to come down and, ultimately, they will separate banks to start cutting interest rates,” he said.

In terms of possible cuts, he noted that Europe and the US are likely to act first, with an expectation that from March rates across these countries could start to taper off.

In Australia, however, Dr Oliver said the Reserve Bank is expected to start cutting from the September quarter, which will boost growth in late 2024 and into 2025.

The Fed’s decision to keep its benchmark rate at 5.25 to 5.5 per cent on Wednesday marked its third consecutive hold and followed further cooling in the US consumer price index (CPI) to 3.1 per cent in November, down from a peak of 9.1 per cent in June 2022.

“Inflation has eased from its highs, and this has come without a significant increase in unemployment. That is very good news,” said Fed chairman Jerome Powell.

“But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain,” he added.

The latest Summary of Economic Projections shows that Fed officials are pencilling in 75 bps of interest rate cuts in 2024, up from 50 bps previously, and a further 100 bps of cuts in 2025. None of the policymakers currently anticipate that rates will rise again.

“When we started out, right, we said the first question is how fast to move and we moved very fast. The second question is really how high to raise the policy rate, and that’s really the question that were still on here,” Mr Powell explained.

“Were very focused on that, as I mentioned. People generally think that we’re at or near that and think it’s not likely that we will hike, although they dont take that possibility off the table.

“When you get to that question, and thats your answer, naturally it begins to be the next question, which is when it will become appropriate to begin dialling back the amount of policy restraint thats in place.”

The Fed chair argued there is “little basis” for thinking that the US economy is currently in a recession, but acknowledged that “theres always a probability that there will be a recession in the next year, and its a meaningful probability no matter what the economy’s doing”.

Mr Powell noted that strong growth in the economy appears to be moderating, as the labour market comes back into balance and “real progress” is being made on inflation.

“These are the things weve been wanting to see,” he stated.

“We still have a ways to go. No one is declaring victory, that would be premature, and we cant be guaranteed of this progress. So were moving carefully in making that assessment of whether we need to do more or not and thats really the question that were on.

“But, of course, the other question, the question of when will it become appropriate to begin dialling back the amount of policy restraint in place, that begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today.”

Seema Shah, chief global strategist at Principal Asset Management, suggested that it is “abundantly clear” that the Fed’s rate hiking cycle is over and the next move will be a cut.

“Markets appear to have been encouraged by Powell’s rather lacklustre pushback at current rate pricing and have further raised their bets that rate cuts will begin early in 2024,” she said.

“However, while a policy pivot looks increasingly likely next year, it is unlikely to materialise until economic growth has visibly slowed, the labor market has softened, and there has been a run of soft inflation prints. By mid-year, these characteristics of a slowing economy should be lined up, finally clearing the path to the first Fed rate cut of the cycle.”

Rate cut expectations ramp up following Fed’s latest call

Three interest rate cuts are now on the cards for the US Federal Reserve in 2024, while locally the Reserve Bank is now expected to begin cutting sooner.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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