Trader attention will be focused on Chair Jerome Powell’s remarks on Friday, as markets continue to resist the Federal Reserve’s higher-for-longer message. This is the last chance the central bank will have to set expectations prior to their December meeting. Before making its announcement on December 14, the Fed will go into blackout on Saturday. Powell, who is scheduled to speak at Spelman College, will have a difficult time persuading the market that interest rates will remain high until 2024.
This is a result of the ongoing decline in inflation. The consumer price index, which was issued earlier this month, climbed just 3.2% annually in October, down from a peak of 9.1% in June 2022. Meanwhile, the PCE price index, the Fed’s intended measure of inflation, dropped in October to its lowest level since March 2021, according to data released on Thursday. Powell’s task of managing markets may have become even more challenging this week when policy hawk and powerful legislator Christopher Waller raised the prospect of rate cuts should inflation maintain its downward trajectory.
Based on the CME’s FedWatch tool, markets are completely pricing in a rate decrease by the May meeting, with over a 50% possibility that they move in March. That was a 21% likelihood a week ago. Bond rates have fallen, especially on the short end of the curve, with the U.S. benchmark 2-year yield down by 27 basis points this week alone. Money markets are also pricing in well over 100 basis points more cuts for next year. The 10-year yield is down about 15 basis points, and it was at 4.247% on Thursday, the lowest level in two and a half months. It reached a peak of 5.0% on October 23.