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Rate cut expectations

The last FOMC meeting of the year will take place in 2 weeks. Inflation is currently at 3.2% YoY, with the energy component relatively stable. The US economy grew on the third quarter at 4.9%, pending revisions, unemployment is still very low at 3.9%, and equity markets seem to be in recovery mode, trying to regain the prior peak of December ‘21. If the Fed were 100% data dependent, an argument could be made for another #ratehike to push inflation even lower to the desired 2% range. The market, however, through Fed funds futures, is discounting a cut as soon as May ‘24, as you can see in the chart below. Expectations are very volatile, and subject to abrupt change if there is a shock in the market like the #svb failure in March, but they’re pointing towards cutting. There is an unwritten rule that the Fed doesn’t like to surprise the market on rates, and it typically manage those expectations through speeches by FOMC members. Yesterday, FOMC member Waller spoke; Today, Mester speaks, and tomorrow Williams speaks. They will set the tone for December 12th meeting and expectations will adjust accordingly.

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Chart source: Bianco research

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