Federal Reserve Expected to Cut Interest Rates in 2022 as Inflation Remains Modest
Traders are predicting that the Federal Reserve will not raise interest rates again in 2023 and may begin cutting them early next year, according to a recent government report. The report showed that consumer prices only increased moderately last month, leading traders to bet on a potential rate cut.
Futures tied to the Fed’s policy rate are now showing less than a 10 percent chance of a rate increase at the upcoming policy meeting in September. This is a significant drop from the previous prediction of a 14 percent chance of a rate hike next month. The consumer price index (CPI) for July rose 3.2 percent from a year ago, following a 3 percent increase in June.
Traders are now pricing in a 28 percent chance of a rate hike by November, down from over 30 percent before the release of the CPI report. It is considered even less likely that rates will increase by December. In fact, futures contracts are already pricing in the Fed’s first rate cut by March 2024.
The Federal Reserve has been gradually increasing its policy rate since March 2022 in an effort to bring inflation back to its 2 percent goal. However, analysts believe that the slight acceleration in year-over-year consumer price inflation in July is a result of mathematical calculations rather than indicative of worsening underlying trends.
Experts predict that the rate hike cycle is likely to end soon, unless there is a significant reacceleration of inflation prints after October.
