Fed May End Rate Cutting Cycle

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Fed May End Rate Cutting Cycle

Federal Reserve May End Its Rate Cutting Cycle

Stocks are staging a rebound after the decline from last week, which is a sign of resilience and improved optimism. The overall mood in the market is that the Fed no longer has the urgency to lower the rates.

According to experts, the Federal Reserve now only has a few more cuts to make. However, it may be delayed depending on how the inflation situation develops.

Inflation Forecasts Jump Higher

Additionally, the UoM's 5-10Y inflation forecast jumped to 3.2% in November. This is a really high reading, which has not been seen in the last 30 years.

Also, the current Fed's policy is very neutral when it comes to GDP growth. Interest rates at these levels are enough to balance the inflation worries and the growth. So, any more rate cuts at this stage may disturb the balance and lead to more problems for the Fed down the road.

If we look at the data, it becomes clear that bill issuance has jumped while the issuance of longer durations has declined to record lows. Now, the real question is whether the Treasury secretary will take measures to clear the issue or leave it as it is.

The bigger question is how all of this will affect the stock market. If we look back, an increase in bill issuance was always a positive signal for the stock markets. So, if we see similar stuff happening in 2025, the stock markets may move lower.

Another important thing to remember is the Quarterly Refunding Announcement. This will likely happen in Jan/Feb 2025.

The bigger picture is that the Fed may have to leave its rate-cutting cycle for some time. Now, that will not be received well by the stock markets, which are anticipating even lower rates in 2025. However, that could be offset by lower corporate taxes and incentives by the new US government.

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