All eyes on US rate cut path ahead of Fed December minutes

(Alliance News) - Investors on Wednesday are scrutinising the release of the minutes to the December Federal Open Market Committee meeting, hoping to find some context around the Federal Reserve's dovish pivot.

Notably, investors will be paying close attention for any further guidance on rate cuts.

"As ever, the minutes will be closely scrutinised for any changes in Fed rhetoric, with particular regard to its current stance on the likelihood of rate cuts. Currently, the consensus is overwhelming that the Fed will keep rates unchanged this month, with the majority expecting the first cut to be announced in March," said Richard Hunter, head of markets at interactive investor.

Market expectations for at least 150 basis points of cuts this year are markedly more dovish than those of the Fed itself. The central bank's latest quarterly dot plot showed that most officials expect rates to be in the range of 4.4% to 4.9% by the end of 2024. The federal funds rate currently stands at a 22-year high of 5.25% to 5.5%, so the dot plot is showing cuts of 100 basis points or less.

Lloyds Bank commented: "What was particularly noticeable about December's Fed update was the seeming lack of any attempt to caution that market expectations of early rate drops were excessive. There had been some speculation beforehand that the Fed may see recent financial market moves as an excessive easing in financial conditions that would effectively add up to an early unwarranted easing in monetary policy. However, there was little indication in the Fed's press statement or in Fed Chair Powell's comments of any such concerns."

"Indeed, in marked contrast to the December policy updates from the Bank of England and the European Central Bank, the Fed seemed to effectively endorse market expectations.

"Today's minutes will provide a further indication of whether that interpretation is correct."

More pessimistically, Susannah Streeter, head of money & markets at Hargreaves Lansdown, noted that "there is a dose of realism settling in that even if rate cuts do come sooner this year, they've climbed so high, that they will still be staying elevated throughout 2024, and have the potential to cause economic pain."

Meanwhile, AJ Bell investment director Russ Mould noted that messaging from the Fed was a "touch confused at the end of 2023."

After the Fed had signalled rate cuts, some officials attempted to reign in market expectations.

In December, New York Federal Reserve President John Williams told CNBC's "Squawk Box" that the central bank isn't "really talking about rate cuts right now." Separately, Atlanta Fed President Raphael Bostic, who votes on monetary policy next year, told Reuters that he expects two rate cuts in 2024 but not starting until the third quarter.

Wednesday's job openings & labour turnover survey, or JOLTS, will also provide crucial insight into the health of the US labour market. Alongside Thursday's ADP jobs report and the weekly jobless claims, it will set the stage for the closely-watched non-farm payrolls print on Friday.

By Sophie Rose, Alliance News senior reporter

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