In comments made last week by a number of members of the Federal Open Market Committee, traders and investors should hold their horses on a cut in overnight banking rates anytime before June 2024. There appears to be some sentiment among Committee members that reducing the overnight lending rate between banks (federal funds rate) and the discount window (where banks go to a federal reserve bank and borrow funds) may slow down or thwart the progress the Board of Governors of the Federal Reserve System is arguably making in reducing the increase in prices faced by consumers and producers.
There appears to be consensus among FOMC members that the jump in January 2024 prices provided them a cautionary signal on rate cutting. Easing rates could stall or even reverse progress in achieving price stability. Federal Reserve forecasts show prices for consumer goods and producer output are expected to climb at their fastest pace since early 2023. In the absence of some significant economic event, holding off on cutting rates should not have a significant impact on markets especially given the resiliency shown by one market in particular, the labor market.
Philip Jefferson, vice-chair of the Federal Reserve’s Board of Governors, cautioned last week on three big risks to the inflation outlook:
- Consumer spending exceeding expectations and placing upward pressure on prices;
- Oil and other commodity markets adversely affected by conflicts in West Asia; and
- Declining employment in the face of slowing growth.
(Are you ready for your next trader challenge? Visit https://traderswithedge.com/?r=348)
Bloomberg reports that Goldman Sachs, an investment bank, believes that the FOMC will start cutting rates in June. Goldman sees four cuts this year and four cuts in 2025. Because the largest risks due to past rate hikes appear to have passed, cuts are not seen by the FOMC as urgently needed.
In my opinion, retail foreign exchange dealers and retail forex traders should figure these projected rate moves into their forward exchange contracts. Ten-year yields on U.S. and U.K. government bonds fell between the 21st and 23rd of February with traders and investors apparently betting on the expectations of the inevitable rate cut.
Alton Drew
25 February 2024
For more of my take on the American political economy, purchase my book at amazon.com/author/altondrew.
Disclaimer: The above information is not provided as legal or financial advice. Please consult a legal or financial advisor before making a trade or an investment. This page may contain affiliate links. If you choose to click an affiliate link, I may receive a commission at no additional cost to you. Thank you for your support.
Lawyers Write the Bets. Bankers Sell the Bets. 