Image source: Pixabay

CME Fedwatch rate cut odds for June barley changed despite a second hotter than expected CPI report. But the rate cut odds did change for November and December.

CME Fedwatch chart, anecdotes by Mish.

In response to a second hotter than expected CPI report, the market priced out a rate cut for December.

Near term odds through June barely changed. The odds of no cut in March are now 99.0% up from 98.0 percent yesterday.

The expectations for no cut in May were 81.7 percent yesterday and 86.1 percent today.

Fed Signals

The Fed signaled a rate cut for June because that is what it wants to do, data be damned.

The odds of at least one cut in June were 71.6 percent yesterday and 68.3 percent today.

The market has gotten the message the Fed will cut in June. This will hold barring some very hot CPI data in April, and perhaps even then.

Weighted Average CME Interest Rate Projections

CME Fedwatch data, chart and calculation by Mish

The market was unfazed by the hot CPI data all the way to November.

Then in November the the expectations of higher for longer rose by 8 basis points, and in December another 12 basis points, for a total of 20 basis points.

A quarter-point cut is 25 basis points. So one rate cut was priced out.

Fed and Ex-Fed Comments

• Eric Rosengren, who headed the Boston Fed from 2007 to 2021, said the Labor Department’s reading shouldn’t fundamentally alter expectations for three rate cuts this year, as officials penciled in at their December meeting.
• Fed Chair Jerome Powell has signaled that inflation readings don’t necessarily need to be better than the mild ones recorded late last year for the central bank to begin lowering rates later this year.
• “If inflation seems more entrenched than we think it is, the first thing we would do is keep rates where they are for an extended period of time,” said Minneapolis Fed President Neel Kashkari in an interview last week.

Comments as reported by the Wall Street Journal.

Reflections on Asymmetrical Policy

The Fed has decided it will cut. So it will cut. It decided June, so June it is.

If CPI data is very tame or hot in April, this could change. But if so, it will be accompanied by a parade of Fed presidents yapping their intentions.

Any deviation from June will be a cut in May rather than a further pause in June.

The Fed has proven countless times that it errs on the side of too loose, allowing asset bubbles to form.

What About Recession?

Good question. The odds of a recession this year are much higher than the prevailing soft landing theory would have you believe.

If and when it happens, all the yahoos will be howling the Fed should have cut in March.

But one rate cut or even two are not going to matter. The Fed kept rates too low, too long again, allowing asset bubbles to blow. Asset bubbles will eventually burst no matter what the Fed does.

The Fed’s choice is to lean against them or allow them to get bigger. There is no point in history where the Fed has ever leaned against asset bubbles.

CPI Hot Again

CPI Data from the BLS, chart by Mish.

For discussion of the latest inflation data, please see CPI Hot Again, Rent Up at Least 0.4 Percent for 30 Straight Months

For over two years, analysts said rent was declining or soon would be. But for the 30th consecutive month, rent was up at least 0.4 percent. Gasoline rose 3.8 percent adding to the misery.

Over the Rainbow View

Let’s check in with former Fed Vice-Chair Alan Blinder and his soft landing thesis.

Hoot of the Day “The Fed Has Reached the Soft Landing Runway”

Despite year-over-year CPI up 3.2 percent Alan Blinder says “The Fed has Already Achieved a Soft Landing”

Sticky-Price CPI

Meanwhile, the Atlanta Fed reports Sticky-Price CPI Is Up 4.4 Percent From a Year Ago

And Biden’s regulations, big union wage increases, and student debt cancellation are all inflationary.

So is the end of just-in-time manufacturing and global wage arbitrage.

The rise in Inflation is not transitory. It’s the recent decline in reported year-over-year inflation that’s transitory.

More By This Author: