Could the Fed Possibly Cut Rates as Early as March?

Last Edited by: LPL Research

Last Updated: January 16, 2024

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Jeffrey Roach (00:02):

Could the Fed possibly cut rates as early as March? Yes, and here are three reasons. First, the pipeline of inflation is clearing. Producer prices in December fell for the third consecutive month, indicating the pipeline is indeed clearing and consumer prices will slow even further to get to that Fed's 2% target. After the latest producer price data release, yields on the two-year Treasury reached the lowest since mid-May 2023, as markets expect overall borrowing costs to ease throughout this year. Producer prices for the brokerage and investment services rose over 3% from a month ago, indicating strong demand for financial advice. So the bottom line is this. Underlying inflation trend is improving and the Fed can legitimately consider cutting rates this year. Investors must be patient during the slow-moving disinflationary process. Second, services prices are finally starting to cool. Sure, markets will be choppy as they digest the ongoing inflation metrics, but the latest observations show that core consumer prices ex-shelter rose 2.18% from a year ago.

 

Jeffrey Roach (01:03):

Current inflation dynamics are not as dire for homeowners who locked in historically low rates before the Fed began their aggressive tightening campaign. And remember, goods prices versus services prices are on two very different glide paths. Third, other central bankers are hoping to mirror the Fed. Thinking globally, inflation in Europe continues to hound policymakers and investors alike. Annual German inflation is uncomfortably close to 4%, although inflation for the full European Union is below 3%. Despite the inflation pressures in Germany, the European central banks' next move will likely mirror the Fed as they are expected to cut their benchmark rate as inflation eases across the region. Investors should know that this has important ramifications for the U.S. dollar. So to sum it all up, markets have not materially changed expectations that the Fed could begin cutting rates as early as March, but much depends on economic growth in the early months of this new year. But at least inflation dynamics are setting the Fed up for an early cut. Well, if you want more insights on global market trends, follow us on social media and take care.

LPL’s Chief Economist Dr. Jeffrey Roach discusses three reasons why the Fed could cut interest rates as early as March.

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