Interest rate cuts: when, how much, and what it means

With hikes unlikely, when will interest rates lower?

The recent shift in market expectations for interest rates has been significant. Just a few months ago, futures markets were pricing in an additional hike by the Federal Reserve in 2023, but now the focus has shifted to potential rate cuts.

With interest rates likely at their ceiling of 5.25 – 5.50%, traders now look to rate cut probabilities in 2024. This shift in expectations comes after soft inflation data and the understanding that looser monetary policy may be needed for a soft landing.

Looking a full year out (December 2024), markets are predicting the likelyhood of rate cuts 100 basis points or greater to be 68%¹. The same futures data tells us that the first rate cut will most likely take place at the FOMC’s May meeting². The timing of such rate cuts is especially sensitive to economic data releases as the Fed will try its best to avoid a recession.

Rate expectactions’ impact on the dollar

The recent decline in the US dollar can be attributed to the changing expectations for interest rates. As the market prices in lower rates, the dollar has weakened against other currencies like the pound and the euro. USD had its worst day of the year against GBP and EUR on Tuesday after lower-than-expected CPI data.

However, it is important to note that these market dynamics can change quickly. Inflation could rise again, leading to a reversal in interest rate expectations and a strengthening of the dollar. The dollar’s performance is also contingent on other global economies. If economic conditions in the US’s worsen less than countries in Europe or Asia, the dollar may still appreciate due to relative strength.