Traders have bet that the Federal Reserve won’t begin easing policy until May, following a week in which better-than-expected economic data and central banker comments eroded investor confidence in the prospect of an early start to interest rate decreases.

The president of the Chicago Fed, Austan Goolsbee, stated that the U.S. central bank will not commit to rate decreases until it is more certain that inflation is on track to a healthy 2%. On Friday, a closely watched gauge of consumer sentiment reached its highest level in two and a half years.

The likelihood of a Fed rate drop by March is now reflected in futures contracts that settle to the Fed’s policy rate, which decreased from 55% earlier in the day to roughly 47%.

A week ago, the likelihood of an interest rate reduction in March from the present range of 5.25% to 5.5% was estimated to be around 80%, which was in line with faster-than-anticipated drops in inflation. At their December meeting, Fed officials themselves had hinted that their rate-hike campaign was definitely coming to an end and that they would probably start to reverse direction in 2024.

But during the past week, evidence of the consumer’s ongoing resilience and suggestions that the fight against inflation is far from over have made it less likely that the Fed will change course very soon.

In their final week of public remarks before going into self-imposed silence before their late-January meeting, central bankers have also hinted that a rate cut might not happen anytime soon, even as they continue to praise the fight against inflation and leave the door open for a rate hike a little later in the year.

Once the Fed gets going this year, traders will likely see a number of rate reduction; however, based on futures contracts, they are now speculating that the Fed may only deliver five 25 basis point cuts by year’s end, as opposed to the six cuts they had previously priced in.

(Adapted from USNews.com)

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