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This week, we’re diving into the topic of Fed rate cuts and how they’re factored into the 2024 market. You may have heard CNBC guests discussing the likelihood of six Fed cuts being priced into the market, and you might be wondering where that information comes from. Well, it’s not just an opinion or a random guess — the data actually comes from the CME FedWatch tool.
The CME FedWatch tool leverages data from fed funds futures contract prices to determine the likelihood of a rate cut (or hike) in the near-term, such as the next meeting, or the direction of rates over the next year. The overnight fed funds bank lending rate is the key indicator in these discussions, with the current range sitting at 5.25% to 5.5% after 11 rate hikes from March 2022 to July 2023.
To understand how many cuts are priced in for the full year, you can use the CME FedWatch tool to determine where the market predicts the Fed target rate will be by year-end in December. Currently, the highest probability is being attributed to a 375 to 400 basis point cut range by the end of 2024, which would equate to six 25-basis-point cuts. This information can be found on the CME FedWatch tool and can be used to gain insights into the market’s expectations.
It’s important to note that while the general view is that lower rates are favorable for stocks, the reason behind the rate changes is equally important. If rates are low due to a healthy economy, it’s considered bullish, but if rates are low because the economy is faltering, it’s not as positive.
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So, if you have any questions about the investment process or would like to dive into specific industry-related topics, feel free to reach out to our Club Mailbag at investingclubmailbag@cnbc.com. We’re here to help you navigate the world of investing with expert analysis and a friendly approach.
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