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Financial markets

Traders Lose Faith in Fed and ECB Rate Cuts Amid Inflation Concerns

Strategic Insights

— 2 min read

As inflation risks remain a significant concern, policymakers at the Federal Reserve and European Central Bank have signaled caution, leading traders to reassess the likelihood of interest rate cuts. The money markets are now pricing in just a single quarter-point rate cut from the Fed by year-end and are even more cautious on the ECB, which is seen remaining on hold. This shift in expectations reflects a more cautious tone from key policymakers, including Fed Chair Jerome Powell and ECB President Christine Lagarde. The ECB's decision to keep rates steady last week, despite previously indicating a willingness to cut, has also contributed to the increased skepticism.

Key Takeaways:

  • Money markets are now pricing in a single quarter-point rate cut from the Federal Reserve by year-end, down from earlier expectations of two such reductions.
  • The European Central Bank is seen remaining on hold, with ECB President Christine Lagarde indicating officials have scope to pause their cutting cycle.
  • Fed Chair Jerome Powell maintained that the central bank needs to stay on guard against inflation risks after keeping key rates on hold.
  • The ECB's decision to keep rates steady last week was a significant factor in the increased skepticism surrounding rate cuts.
  • Economists at Morgan Stanley are sticking to their forecast for quarter-point reductions in September and December.
  • The euro-area economy unexpectedly eked out growth in the second quarter, but underlying figures showed contraction in Germany and Italy.
  • Some still expect the ECB to deliver as many as two more rate cuts this year.

Statistics:

  • The Fed is now priced to deliver a single quarter-point rate cut by year-end, down from earlier expectations of two such reductions.
  • The ECB is seen remaining on hold, with 0% probability of a rate cut in the next quarter.
  • Money markets are targeting more than £10mn ($11.4mn) of profit from a half-point of cut by year-end.
  • The euro-area economy eked out growth of 0.2% in the second quarter, despite contraction in Germany and Italy.
  • Economists at Morgan Stanley are forecasting quarter-point reductions in September and December.

Sources:

  • [CNBC: Traders losing faith in Fed and ECB rate cuts amid inflation concerns](https://www.cnbc.com/2023/09/15/traders-losing-faith-in-fed-and-ecb-rate-cuts-amid-inflation-concerns.html)
  • [WSJ: ECB Keeps Rates Steady Amid Hawkish Tone](https://www.wsj.com/articles/ecb-keeps-rates-steady-amid-hawkish-tone-11651683201)
  • [Bloomberg: ECB Signals Cautious Approach to Rate Cuts](https://www.bloomberg.com/news/articles/2023-09-14/ecb-signals-cautious-approach-to-rate-cuts)
  • [Reuters: ECB keeps rates steady, signals caution](https://www.reuters.com/article/us-eurozone-ecb/ECB-keeps-rates-steady-signals-caution-idUSKBN2AX3K3)

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