Federal Reserve officials are planning to finally cut interest rates this year and Wall Street thinks that first cut will come as soon as March.
But investors' hopes are slowly dwindling. Now there's roughly a 50/50 chance that the Fed could either cut rates or hold them steady in March, according to futures.
That's down from expectations that were around 70% only a few weeks ago, as the market rejoiced in seeing inflation steadily inch closer to the Fed's 2% target throughout 2023.
A few developments this past week tempered investors' optimism, and now the possibility of a rate cut in March could be completely thrown out the window, according to economists.
Fed Governor Christopher Waller, an influential official at the central bank, said in a speech last week that there is no rush to cut rates.
"When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully," he said Tuesday during a virtual discussion hosted by The Brookings Institution.
"With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past," he said.
He echoed other Fed officials who've recently said that beginning to cut rates in March is just not realistic.
"I think March is probably too early in my estimate for a rate decline because I think we need to see some more evidence," Cleveland Fed President Loretta Mester, who votes on policy moves this year, told Bloomberg TV recently.
She added that the latest Consumer Price Index, which showed that inflation picked up slightly in December, "just shows there's more work to do, and that work is going to take restrictive monetary policy."
San Francisco Fed President Mary Daly also shared a similar sentiment Friday in an interview with Fox Business.
"While I think it's appropriate for us to look forward and ask when would policy adjustments be necessary so we don't put a stranglehold on the economy, it's really premature to think that that's around the corner," she said. Daly also votes on interest-rate decisions this year.
In addition to officials' comments, recent economic data also doesn't bode well for a March rate cut.
Retail sales rose 0.6% in December from the prior month, the Commerce Department reported Wednesday, beating economists expectations and showing that Americans are still fueling the economy with their spending.
Consumer spending accounts for about two-thirds of economic output, so spending figures are looked at closely to gauge the economy's health.
The job market also appears to remain on a strong footing. New applications for jobless benefits dropped in the week that ended on January 13 to a level not seen since the fall of 2022, the Labor Department reported Thursday.
Employers added a robust 216,000 jobs in December and the unemployment rate held steady at a low 3.7%.
A rapidly weakening economy would typically prompt the Fed to cut rates sooner and more aggressively, so stronger-than-expected economic data means there isn't any urgency to cut rates, as Waller suggested last week.
Markets are expecting twice as many rate cuts this year than what Fed officials themselves estimated in their latest economic projections released in December.
"The upside surprise from jobless claims was a reminder to financial markets that the Fed is assuming a stronger path for the economy and more persistence of inflationary pressures than would be consistent with six interest rate cuts over the course of the year," Bill Adams, chief economist at Comerica Bank, told CNN.
There are still some risks that could stall inflation's descent, or even cause it to reignite, such as the ongoing conflict in the Middle East. Iran-backed militants in the Red Sea have shut down one of the world's main trade routes for most container ships, which carry key parts for many consumer goods.
That could drive up consumer prices and there is still the risk that the geopolitical conflict pushes up energy prices.
"All of that is probably not going to stop the overall downward path of inflation, but it certainly could delay rate cuts," Daniel Altman, chief economist at Instawork, told CNN.
But while the recent spate of strong economic data may dash hopes of early rate cuts, they also indicate that the Fed still has a decent shot at pulling off a so-called soft landing, which is a rare outcome in which inflation reaches 2% without a sharp rise in unemployment.
Fed Chair Jerome Powell's remarks after officials make their latest interest-rate decision later this month should give markets some additional clarity on what to expect from the central bank, which seems to be that a March rate cut is simply not in the cards.
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