For markets, that door has certainly opened up after the US CPI report yesterday. But personally, I still hold some reservations. That especially since we have seen traders run back the post-CPI moves previously in the last two months.
However, for now, we are seeing traders start to open up to the idea of three rate cuts by the Fed for this year.
The current pricing shows that September is pretty much a done deal at ~98% priced in. It was previously ~80% before the inflation numbers yesterday. Meanwhile, traders are now seeing ~60 bps of rate cuts for the year as opposed to ~50 bps before the report.
I still think it's a tall order for the Fed to go with delivering three rate cuts this year. The message that such a move will imply is that they have won the battle against inflation. And I reckon the Fed will want to avoid getting too carried away in that sense.
Then again, there's always the argument that they could say even with cutting rates several times that policy is still "restrictive".
In judging the plausibility of three rate cuts, I reckon a lot will come down to how the Fed frames its plan for September.
If they sell it as a straightforward narrative, it opens up the door for back-to-back moves at least. And that means three rate cuts for this year could be probable. But if they sell it as a potential one and done, then markets might have to rethink again the latest moves after the US CPI report yesterday.
But even then, September might not be quite a done deal. Markets were sure the Fed was going to cut in March, then April. And look where we are now.
Of course, there is much more confidence to the disinflation process now compared to back then. But still, it's a lesson worth keeping in mind.
