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Investors adjust their bets on Fed’s interest rate cut for 2024

Investors adjust their bets on Fed's interest rate cut for 2024
Vinicius Barbosa

Finance markets trembled early this week in the expectation of the Federal Reserve’s target interest rate decision on May 1. Investors have adjusted their portfolios and forecasts of what was expected to be an interest rate cut in 2024.

Finbold retrieved data from the CME FedWatch on April 30 for insights on the dominant sentiment and expectations.

Notably, 99.5% of the market expects the interest rate to remain between 525-550 basis points (bps) for tomorrow’s meeting. Looking further, investors drastically changed their forecast of a rate cut for June 12, with only 9.87% expecting it. Previously, over 55% of the market was betting on a rate cut by June.

The following meetings’ probabilities show a similar dynamic, with investors adjusting their positions to forecast a dominating hawkish monetary policy.

Target Rate Probabilities for June 12, 2024 – Fed Meeting. Source: CME FedWatch

The U.S. inflation and hawkish interest rate decisions

Fears of rebounding inflation are forcing investors to prepare for a scenario few expected to confront in 2024. Strong economic reports suggest that inflation could creep back if the U.S. central bank lowers the interest rates prematurely. As a result, expectations for policy easing by the Federal Reserve are falling rapidly.

Futures markets now show investors expect rates to fall by 40 basis points this year. This is a significant change compared to the 150 basis points that were priced at the start of 2024. Consequently, the fading prospect of rate cuts presents a dilemma to market participants.

Many investors piled into stocks, cryptocurrencies, and bonds over the last few months, hoping for policy easing. However, with key bull market support fading, some are now scrambling to readjust their portfolios. Despite the S&P 500 index standing near record highs, equity investors are loading up on insurance in the options market, as reported by Reuters on April 11.

Moreover, they pour money into popular inflation hedges such as energy stocks, gold, and silver. Bond investors are already feeling the pain as they reposition portfolios amidst a weeks-long selloff that has hammered Treasury prices. Analysts have rushed to upgrade forecasts to push back rate cut expectations.

Additionally, the cryptocurrency market has suffered in the meeting’s eve, with crypto traders losing over $100 million in just four hours of massive liquidations. All in all, investors await hints and insights from the Federal Reserve meeting on May 1 while already preparing for a likely hawkish policy that could slow down the economy longer than previously desired.

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