© Reuters.
Investing.com– Traders were seen pricing in a greater chance that the Federal Reserve will keep interest rates on hold in March, the CME Fedwatch tool showed on Monday, signaling a drastic shift from earlier expectations for a rate cut.
The tool showed pricing in a 50.7% chance the central bank will keep its benchmark interest rate in a band of 5.25% to 5.50%, up sharply from a 19% chance seen last week.
Expectations for a chance of a 25 basis point cut- which were running high for nearly two months- now stood at 48.1%, down sharply from the 76.9% probability seen a week ago.
The shift in expectations for a rate cut came amid a slew of strong U.S. economic readings, with remaining strong, inching higher and the continuing to run hot.
A chorus of Fed officials also downplayed expectations for an early rate cut, stating that resilience in the U.S. economy gave the bank more impetus to keep rates higher for longer. They also noted that consumer inflation remained well above the Fed’s 2% annual target, and that rate cuts would only come when inflation was moving closer to the target.
“While I think it’s appropriate for us to look forward and ask when would policy adjustments be necessary, so we don’t put a stranglehold on the economy, it’s really premature to think that that’s around the corner,” San Francisco Fed President Mary Daly said in an interview on Friday.
Atlanta Fed President Ralph Bostic also said last week that he expects rate cuts to begin only from the third quarter. Both Bostic and Daly are part of the rate-setting committee this year.
Comments from Fed officials came just ahead of the media blackout period before the central bank’s January meeting. The Fed is widely expected to keep rates steady at 23-year highs , with the CME tool pointing to a 97.4% chance for a hold.
Expectations of early interest rate cuts by the Fed had driven a stellar rally in global financial markets towards the end of 2023. But this rally had somewhat slowed in recent weeks, in the face of higher-for-longer rates.
The had surged to an over one-month high last week on the shifting expectations, while broke back above the 4% level.
While the Fed signaled in its December meeting that it will consider cutting interest rates in 2024, it gave scant cues on the timing and scale of the potential cuts. The central bank had also warned that any signs of sticky inflation and labor market strength will keep rates higher for longer.
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