Interest Rates: Easing cycle expected to begin, but are the markets getting ahead of themselves…again?
The Fed is widely expected to begin—and itself is signaling—lowering interest rates in 2024. But not unlike earlier in the rate-hiking cycle, the Fed and the markets have different views on what the Fed will do.
Kiran Kini, CoBank senior vice president and treasurer, offered his views on potential interest rate movement and inflation.
“It seems fairly evident that the hiking cycle is over,” Kini stated. “The questions now are when does the Fed start easing, how aggressively and over what period of time. That is going to be the theme of 2024.
“The markets seem to think the Fed will cut rates fairly aggressively,” he added. “We're not completely sold on that view. The Fed has told us their base-case scenario is that they lower rates three times in 2024, with policy rates 75 basis points lower than where they currently are. The markets, however, are pricing in six or seven 25-basis-point cuts for the year. We think the markets are getting ahead of themselves, but understandably so.”
Kini attributes the markets’ enthusiasm to a continuing belief that a hard landing—a potential recession—remains a possibility, which would force the Fed’s hand for more aggressive cuts.
“The markets think there is a non-trivial chance that we could still end up in a hard landing and the Fed might be forced to cut rates aggressively,” said Kini. “But the Fed is likely to keep pushing back on that. For now, the Fed seems to think in terms of three to four cuts, given their base case is that the economy moves into a growth slowdown and a soft, rather than a hard, landing.”
With respect to inflation, Kini acknowledged December’s uptick in the Consumer Price index (CPI), indicating a slight increase in inflation. The CPI, however, is not the Fed’s primary measure of inflation. Kini said the Fed’s primary gauge—the Personal Consumption Expenditures (PCE) price index—is expected to tick down, with recent trends tracking close to 2%, which is in line with the Fed's target.