Fed’s stay-high mantra fails to stop bets on a 2023 rate cut

Federal Reserve officials keep repeating the mantra they don’t plan to cut interest rates next year. Traders keep doubting them.

Eurodollar futures showed reduced expectations Wednesday for Fed interest-rate cuts in 2023 but still price in around a one quarter-point move and at least two more in 2024. Federal Reserve Bank of San Francisco President Mary Daly and Fed Atlanta President Raphael Bostic were the latest to bang the drum on the need to keep tightening in place to reduce inflation that remains near a four-decade high.

Traders briefly erased bets on 2023 cuts after the Fed’s strongly hawkish meeting last month, but a series of global economic and geopolitical shocks have reinforced deep concerns that the US and other major economies will tip into recession. As much as Fed Chair Jerome Powell has insisted the lessons of the 1980s show the need to focus on inflation and not growth, investors refuse to believe he will remain steadfast in the face of a severe downturn.

“Fed officials’ consistent push back against rate cuts may reflect a desire to avoid hinting at any loosening in financial conditions,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. “If they remain that determined and move into very restrictive territory, as the dot plots would suggest, a US recession is likely and some reversal of policy will likely be needed at some stage.”