One rate cut or two? Market predictions for 2024 are shifting

After many months of grappling with "sticky" inflation, and economic readings worse than what analysts anticipated, the Federal Reserve has finally caught a break.

The Consumer Price Index (CPI) rose 3.3% in the year to May, matching April's reading. While higher than the central bank's target of 2%, it was slightly better than expectations.

Although the Fed won't cut interest rates on the strength of one reading alone, the upbeat data has left traders predicting that reductions will come sooner than previously thought.

According to the CME FedWatch Tool—a key gauge of the market's rate assessment—the probability of a 25 basis point cut after policymakers meet in September now stands at 62%—up from 55% a week ago and 48% a month ago.

The chance of the Fed's target rate remaining at its current level of 5.25% to 5.5% by the time of November's meeting is now set at 17.4%. It was 22.5% a day ago.

And by December, there's a 44.9% likelihood of interest rates tumbling to a range of 4.75% to 5%, with all other scenarios deemed to be less probable, according to the markets.

But what does the Fed think?

For his part, Fed Chair Jerome Powell appears to be keeping all options on the table.

Members of the Federal Open Markets Committee seemed pretty divided in their newly-released "dot plot" update outlining how they think rates should evolve in the years to come.

While seven policymakers concluded that one 25 basis point cut should take place by the end of 2024, eight lobbied for two. Just four believed that rates should stay where they are.

Powell appeared to hint that the latest dot plot, which hit the press as the FOMC deliberated at its last meeting, may not have factored in the significance of the latest CPI reading.

"Really, it's going to be not just the inflation readings," he warned during a news conference.

"It's going to be the totality of the data, what's happening in the labor market, what's happening with the balance of risks, what's happening with the forecasts, what's happening with growth. You're looking at all of that."

Refusing to specifically commit to two rate cuts will give the Fed's economists a little bit of breathing room to see how the picture plays out.

This may be an indication that the U.S. wants to avoid finding itself in the same predicament as the European Central Bank, which has been accused of cutting rates prematurely.

The Fed may also be trying to learn lessons from past mistakes.

"Their past experience in mischaracterizing inflation as 'transitory' is going to lead to extreme caution in trusting signs of good news," Jeffries senior economist Thomas Simons told Reuters.

More from Creditnews:

• Is the ECB already regretting its decision to cut rates?
• Black and Hispanic workers benefit from low interest rates the most, says a Fed economist
• One economist predicts mortgage rates as high as 10% under Trump
• Johns Hopkins economist: The Fed should target 4% inflation and convince Americans it's not a problem
• New York City hotel prices hit yet another record high—thanks to a swell of migrants
• There’s ‘35% probability’ the Fed drags U.S. into recession, says influential economist
• This is 'new economy' where recession indicators don't work, according to Fisher Investments