Fed’s Potential Rate Cuts in 2024 Spark Contradictions and Market Speculations

Estimated reading time: 3 minutes

Challenging Assumptions

Regardless, at some point in 2024 the Fed is likely to start cutting rates. The issue is, it’s not the hikes that usually getcha, it’s the cuts.

Even if we leave the recession debate aside and only focus on markets, this chart shows the frequency of market bottoms that happen around or after the Fed starts cutting rates. Despite all of the rhetoric that accompanied the hiking cycle, the complacency and optimism that’s surrounding the possibility of cuts could end up being off-base.

Unusual Waiting Period

Interestingly, the period of time between the last hike and the first cut — which is where I’m assuming we currently are — tends to be ok for markets, as shown below. And the average amount of time between the two is 105 trading days (roughly five months). If the last Fed hike was in July 2023, we’re right at that five month mark with no cut to be found. Safe to say this waiting period will be longer than average… and another reason this cycle is one for the ages.

As of this writing, the futures market is expecting the first cut to happen in March 2024, followed by five more cuts before the end of the year. That has moved considerably in the last few months — in late September the first cut wasn’t expected until July 2024.

Market Contradictions

This is one of the growing contradictions I see in markets today. If stocks are rallying and broadening out to represent higher chances of a soft landing, why would we expect cuts to start sooner than before? What’s more, all the chatter about “higher for longer” has quieted down as rates fell and stocks rose. The risk with pulling cuts forward and assuming yields will continue to fall is a possible resurgence in inflation or labor data that might cause markets to rethink the timing and reverse some of its 2023 rally.

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