Daily Brief - Fed rate cuts in 2023?

TLDR: The lady doth protest too much. That, in a nutshell, was the market's reaction to weeks of Fed’s hawkish commentary designed to convince the market it would absolutely not cut rates this year. Not a single Fed official thought a rate cut in 2023 would happen, according to the latest meeting minutes. One abysmal retail sales number later, the tune is definitely changing. This isn’t entirely surprising,

A neat chart below from strategists at Goldman Sachs shows that Central Banks - in the US and elsewhere - pretty much lose all appetite for further hikes right around inflation peaks. This, more or less, is where we are today in the US.

So it’s no surprise that over the weekend, the Federal Reserve telegraphed it another downshift in pace of hikes - and maybe a pause!

To preserve a degree of mystique in this tweet-crazy world, in an almost quaint tradition the Fed still handpicks a news outlet to communicate such market guidance over the weekend. And thus an article in the WSJ reassured the readers - over a cup of Sunday morning coffee, minds likely on the evening’s Cowboys game - that the Fed was ready to downshift rate hiking pace. Again.

But it went further. They hinted at contemplating a pause in the very near term.

None of this will come as a surprise to fixed income traders. They have already priced a 25 bps hike with near certainty - 99% based on the futures pricing. However, it may embolden investors into thinking that officials are starting to come round to a far more dovish view.

Markets are making a far bigger bet that the Fed will also come round to their view on when to cut rates: later this year! As apparent from the chart below, the US central bank is usually on hold for only about 7 months before cutting rates.

Does this mean a rate cut in 2023?

If the last hike does come in Q1, we could be looking at rate cuts as soon as October. Markets are starting to suspect that could well be the central event of 2023.

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