The blistering inflation report for March, marking the third consecutive month of surpassing expectations, coupled with an unexpectedly tight labor market report for the third consecutive month, jolted market participants and analysts into a dramatic overhaul of interest rate projections.

To convey the seismic shifts witnessed over the past two days, market-implied probabilities of a June rate cut plummeted from 60% to a mere 20%, while those for July decreased from roughly 80% to 48%.

Before the inflation data, traders factored in nearly three rate cuts (or 70 basis points) by year-end, but now that estimate plummeted to less than two (or 45 basis points).

Merely a month ago, market confidence was so robust that predictions extended to four rate cuts in 2024.

Chart: Market Expectations For Fed Rate Cuts Have Seen A Dramatic Reprice Over Past Month

Also Read: ‘This Puts The Fed In Quite A Tricky Position’: 7 Economists Weigh In On March Inflation Report

Analysts Revise Down Expectations On Fed Rate Cuts

Alfonso Peccatiello, CEO and founder of “The Macro Compass,” on Thursday shared a LinkedIn post about an interesting chart showing the probability distribution for Fed Funds one year from now.

He made three compelling observations:

The probability of the Fed ultimately hiking rates by April 2025 stands at 20%, as indicated by the cumulative sum of the red columns.

Odds favoring a “Higher-for-Longer” stance (yellow-orange) are notably elevated, reaching as high as 40%.

Notably, there persists a fat recession tail, with markets still pricing in approximately a 20% chance of experiencing six or more rate cuts.

Bank of America sees only one cut in December 2024: Bank of America’s U.S. economist Michael Gapen has revised down its 2024 rate-cut predictions from three to one.

“We now expect the Fed to start cutting rates in December. We no longer think policymakers will gain the confidence they need to start cutting in June. 2024 is starting to look like 2015, but in reverse. Then the Fed signaled hikes it could not deliver; now the Fed may be signaling cuts that the inflation data do not justify,” he wrote in a note.

Gapen believed the strengthening of inflation “makes a cut prior to December challenging.”

Similarly, Deutsche Bank expected only one interest rate cut in December 2024.

“With inflation clearly heading in the wrong direction, the Fed might need to remain on hold for longer,” Jay Hawkins, senior economist at BMO, stated.

HSBC remained in the camp of three rate cuts in 2024 and continued to expect the Federal Reserve to start cutting interest rates by 25 bps in June.

James Knightley, chief economist at ING Group, believee that “will need to see a rapid change of fortune to trigger a rate cut in the next month or two.” The Dutch bank now anticipates the Fed’s easing commencing in the third quarter, either in July or, more probably, September.

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