Markets now assume the Fed will make a mistake with rate cuts, BofA says

Jerome Powell has some big decisions ahead of him.Liu Jie/Xinhua via Getty Images

  • Markets now assume the Fed will make a mistake with rate cuts, BofA says

  • Although prospects for a rate cut in March have diminished, investors still expect aggressive rate cuts this year.

  • “Markets are still pricing in about six cuts over the course of this year. This suggests to us that they are pricing in a policy error.”

Jerome Powell likely wanted to take away some of the optimism among investors with his comments about a March rate cut at the Fed’s January meeting. Instead, markets are now betting that the Fed will make a mistake, Bank of America said.

“Markets are pricing in a policy mistake,” analysts wrote in a note on Friday.

The Fed signaled this week that a rate cut in March is unlikely, with Powell stressing that a continuation of “good data” is needed to end the pause in rate hikes. But that did not detract from investor optimism about the cuts for the rest of the year.

“Powell’s strong March statement lowered the price of a March rate cut, but markets are still pricing in about six rate cuts over the course of this year,” Bank of America analysts wrote. “This suggests to us that they are pricing in a policy error.”

Previously, central bank officials have said they foresee this three interest rate cuts in 2024. And yet markets continued to expect more, with some predictions as many as six cuts. Investors were also more optimistic about the timing of the cuts, hoping the first cuts would come early. The CME FedWatch tool showed that traders were betting a 70% chance that the Fed would make a U-turn in early March early last month.

The data now shows that traders expect the Fed to hold rates steady in March…

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