Moreover, the Fed's own summary of economic projections, issued on Dec. 13, revealed that the median Federal Open Market Committee member expects 75 basis points of interest rate cuts in 2024.
The Fed's key short-term interest rate is in the range of 5.25% to 5.5% — the central bank kept rates frozen for three consecutive meetings after having tightened rates 11 times since March 2022.
Kevin Flanagan, head of fixed-income strategy at WisdomTree, said any rate cuts next year will depend strictly on hard economic data over the next few months, namely signs of a continued decline in inflation and a weakening labor market.
"It might be premature to say the Fed will start easing in March 2024," he said. "But we can't rule it entirely out given the surprisingly dovish remarks Fed Chairman (Jerome) Powell recently made at the press conference following the December meeting."
Flanagan pointed out that shortly after Powell's softening stance, New York Fed President John Williams seemed to counteract that dovishness by telling CNBC in December: "We're not really talking about rate cuts now."
So there's much uncertainty now about when and how much the Fed will really cut rates next year, Flanagan said. "It could be in March or it might be in May or June, but it's too early to tell."
WisdomTree has about $100.2 billion in assets under management.
Luca Paolini, chief strategist at Pictet Asset Management, thinks the first rate cut by the Fed will occur in June at the earliest. He noted that while the overall CPI numbers have been falling, service-sector inflation is "still too high and there are reasons to believe that the big decline in goods price inflation is behind us."
Pictet's models suggest that U.S. core inflation is likely to stop declining early next year, stabilizing at about 2.5% to 3%, if the U.S. economy manages to avoid a recession, he added. Pictet has $244 billion in AUM.
Inflation would need to approach the Fed's 2% target level and trend unambiguously in that direction for the Fed to begin cutting rates, said Charles Curry, senior portfolio manager of U.S. fixed income at $15.1 billion asset manager Xponance.
In November, the consumer price index slowed to 3.1%.
It would be premature to begin slashing rates as early as March, warned Andrew Patterson, senior international economist at Vanguard Group.
"We believe economic conditions are going to ease such that rate cuts in most major economies will begin towards the second half of the year," he said. "Conditions that would warrant a cut as early as March are unlikely in our view. If the Fed were to pre-emptively cut as early as March, before further easing in the labor market and significantly more progress on inflation, in an attempt to achieve a soft landing, they risk igniting a re-acceleration in inflation similar to what happened in the late 1960s."
Patterson explained the Fed cut rates to support macro conditions in 1967, "only to have to raise them higher and induce a recession in 1969 as inflation re-accelerated."
Vanguard has about $8.2 trillion in AUM.
Anders Persson, CIO for global fixed income at Nuveen, has penciled in 100 basis points of cuts this year — more than the Fed's latest summary of economic projections, but less than what the market is currently pricing —with the first cut starting in June.
"Overall, we think the Fed can, and likely will, start cutting rates before inflation gets all the way back to 2%," Persson said. "Moving forward, there will be increased focus on the 'full employment' side of the dual mandate; unlike the last two years, Fed policy is no longer exclusively about inflation. If growth slows and the labor market weakens as we expect, then even near-3% inflation is unlikely to be a barrier to rate cuts."
Nuveen has AUM of $1.1 trillion.
The only reason the Fed might consider rate cuts as early as March would be if there were signs of deterioration in the labor market, said Mike Sanders, head of fixed income at Madison Investments, a fixed-income and equities active investor, which has $23 billion in AUM.
But the labor market remains strong, he noted.
"The ongoing strength of the labor market further supports the likelihood of sustained services inflation," he added. "As long as the labor market maintains its strength, it is difficult to envision services decreasing enough to justify a rate cut as quickly as what current market pricing suggests."
