The Fed and the markets... who has the last word?

Gold is at its highest price in 7 months, while the US dollar is at its lowest level in three months. As market movements are subject to the impact of their pricing for the start of lowering interest rates in 2024. There was a division within the Federal Monetary Policy Committee board over the course of monetary policy previously, but whispers from the Chairman of the Federal Reserve were that the agreement not to lower interest rates was unanimous.

While the markets put aside the Fed’s words and began to price in the possibility of reducing the interest rate next June, they even tended to be more optimistic about the date of the start of the monetary easing cycle until next March.

The difference between the markets and the Fed, who will be right?

The markets have always expected future movements, while the banks' policy is to be cautious and react based on economic numbers. The former anticipates and tries to anticipate, while the latter moves based on reality and delays.

Looking at the latest forecasts, neither the markets nor the Fed were always right in the last monetary policy cycle. The markets incorrectly expected a recession, while the Fed made a mistake in predicting inflation and recession and may not succeed in completing the correct expectations at the end of the monetary policy tightening cycle.

Is the Fed convinced to cut rates?

The US Federal Reserve’s approach since the last rate hike last July has been to continue on the path of raising rates. Voices within the Council were calling for a final rate hike, or at least a consensus on remaining at high rates for a long period of time in an attempt to bring inflation back towards the Fed’s target of 2%. . Those voices began to show some change on Tuesday, as Christopher Waller, one of the Fed's most hawkish policymakers, indicated that rates were unlikely to rise further, and could be lowered if inflation continues to slow. It may be the first hint, statement, or signal from a member of the US Federal Reserve about the possibility of reducing interest rates.

This gave the markets what they expected, which is that reducing interest rates has become an idea that can be discussed within the Council, and it is also an idea that the markets believe in, which gives the possibility of reducing rates in June as very expected, and in the month of March it may be a possible idea if it is accompanied by soft inflation numbers. And negative numbers for jobs and economic growth.

Despite Waller's statement, Jerome Powell had mentioned in the last press conference that lowering interest rates is not an idea that monetary policy makers have discussed or spoken about, so the markets may need more votes.

Waller's statement gave the US dollar more negativity, reaching its lowest levels in three months, and pushed gold towards its highest levels in seven months.

Are markets right about interest rate cuts?

It appears that the slowdown in inflation has given investors optimism that the inflation cloud has lifted, as the slowdown towards 3.2% levels without strongly rising readings has led markets to expect that the monetary policy tightening cycle has had its effect on the economy.

However, the economic numbers surrounding inflation may need more signals in the coming period. Not only should inflation record a further slowdown, but economic growth should record some moderate readings far from the current conditions at levels of 4.9% for the third quarter, as entry Growth in the negative phase may have the effect of reducing inflationary pressures, and therefore the decline in growth numbers and the decline of inflationary pressures, in addition to the moderation of wage numbers, may be enough for the US Federal Reserve to begin reducing interest rates.

Therefore, the US Federal Reserve will need more economic readings to determine the decision for the next monetary policy cycle, and it needs more time.