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Despite the Fed staying in pause mode to start the year, market expectations are still leaning towards more rate cuts down the road. And that is reflected by the pricing in Fed funds futures as well. Currently, we’re still seeing traders price in ~57 bps of rate cuts by year-end. The recent solid US economic data has only served to push back the timing of the first 25 bps rate cut from June to July. However, that is very much just a switch back to where we were at the start of the year in some sense.As we gear towards the middle of the year, a hot topic with regards to the Fed is about Powell’s departure. It’s unclear if Trump will get his way in placing Warsh in the position of the Fed chair with a blockade at the Senate still in play. But once he does get his way, it is more than likely to see more dovish influence at the central bank.That being said, ANZ is viewing that a softer inflation profile will be more than enough to seal the deal for more rate cuts this year. Despite Trump’s tariffs, US inflation hasn’t really been running hot and there are nascent signs of it even cooling as we get into the turn of the year. ANZ argues that as that trend persists, it will eventually force the Fed’s hands to ease monetary policy further in the months ahead.The firm notes that:”We now expect the Federal Open Market Committee (FOMC) will resume interest rate cuts in Q2, probably in June, as it appears to have little appetite to cut at the March meeting. This change in view reflects the persistent guidance from many FOMC members that the committee can afford to be patient, awaiting confirmation that Personal Consumption Expenditure (PCE) inflation is slowing from its current 2.8% y/y.Owing to an extended pause in the rate cutting cycle, which we expect will increase disinflationary pressures, we are adding an additional 25bp rate cut to our forecast profile. We now forecast three 25 bps rate cuts this year – one each in Q2, Q3 and Q4 – to leave the federal funds target range at 2.75–3.00%.”
This article was written by Justin Low at investinglive.com.
💡 DMK Insight
The Fed’s pause on rate hikes is a double-edged sword for traders right now. While the market is pricing in about 57 basis points of cuts by year-end, this expectation could lead to increased volatility in both equities and forex markets. If the Fed does pivot to cuts sooner than anticipated, we might see a rally in risk assets like stocks and cryptocurrencies, as lower rates typically boost liquidity. However, if inflation data surprises to the upside, it could force the Fed to maintain a tighter stance, leading to a sharp correction in those same assets. Traders should keep an eye on upcoming economic indicators, especially inflation reports, as they could shift sentiment dramatically. Watch the 4,000 level in the S&P 500 and the 1.10 mark in EUR/USD for potential breakout or reversal signals. Here’s the thing: while the mainstream narrative focuses on rate cuts, the risk of a hawkish surprise remains. Be prepared for both scenarios and adjust your positions accordingly.
📮 Takeaway
Monitor inflation data closely; a surprise could shift market sentiment and impact S&P 500 and EUR/USD levels significantly.
