After the Federal Reserve decision, traders expect minimal possibility of rate cuts this year

Key Points

• All positive economic signals released after this week’s Federal Reserve meeting have negatively impacted investors, and the market has now completely priced out even a single rate cut this year.
• Senior market analyst Ed Yardeni called this reaction a “reduction panic,” implying that the previous market sell-off was driven by expectations of tightening Fed policies.

All positive economic statements from this week’s Fed meeting have had a negative effect on investors, and the market has fully discounted the possibility of even one rate cut this year.

At the post-meeting press conference, Fed Chair Jerome Powell expressed an optimistic view of the current economy, even though he acknowledged that net job growth is “zero” and inflation remains above the Fed’s 2% target. Powell described economic growth as “solid” and denied that stagflation is forming.

Although the Federal Open Market Committee (FOMC) statement mentioned “uncertainty” caused by the Iran conflict, Powell did not directly elaborate on this. As Middle East tensions escalate and the Fed appears unwilling to respond, investors are pessimistic about the outlook for loose monetary policy.

The stock market did not rise on the Fed’s apparent optimism; instead, it declined. Stock index futures also fell on Thursday morning.

The CME FedWatch tool shows that, concurrently, the market has adjusted its expectations: as of around 8:50 a.m. Eastern Time Thursday, the probability of the Fed cutting rates by 25 basis points is only 17.2%.

The chance of a rate hike has even slightly increased to 8.4%.

“Reduction Panic”

Senior market analyst Ed Yardeni called this reaction a “reduction panic,” referring to the sharp sell-off driven by expectations of Fed policy tightening.

In a report later Wednesday, Yardeni wrote: “The combination of war and Fed news triggered a reduction panic in the stock market, as investors believe the monetary policy has limited ability to respond to the economic consequences of the war.”

He added, “In fact, Fed Chair Jerome Powell mentioned the war almost not at all. Notably, he believes the economy and labor market are in good shape, and core inflation is expected to slow in the coming months, implying that the Fed will likely stay on hold for the foreseeable future.”

Before the war broke out, traders expected the Fed to cut rates in June, again in September, and possibly once more before the end of the year, depending on labor market and inflation data.

At that time, the market focused on which side of the Fed’s dual mandate would receive more attention — the weak labor market or inflation still above 2% (though well below previous highs).

During this week’s meeting, the Fed officials’ dot plot showed slight changes in rate expectations. Investors could only glean more clues about the Fed’s policy direction from Powell’s comments.

Economy Can Absorb Shocks

Fundstrat analysts stated in a report: “Powell continued to support the view that the Fed has maintained patience over the past two years: the economy’s ability to absorb shocks has exceeded expectations. But the market’s reaction suggests Powell has significantly tightened the outlook for policy.”

Powell mentioned uncertainty in his speech more than ten times, stating that future policy will largely depend on oil shocks and their impact on inflation.

Fundstrat team said: “The next key indicator is whether upcoming inflation data can show that, before energy costs broadly transmit, prices of goods affected by the war will decline first. Until then, Powell’s policy framework remains unchanged: cautious, conditional, and not based solely on forecasts.”

The next FOMC meeting is scheduled for April 28-29. Traders’ pricing indicates a zero probability of rate cuts at this meeting, with a 10.3% chance of a 25 basis point rate hike.