US | Fed’s hawkishness likely to gear up amid a bump in the road in 1Q24

Summary

Financial markets’ expectations on the future path of monetary policy have shifted significantly. While it will evidently take longer than expected to gain confidence on the path to 2%, the Fed is unlikely to rule out rate cuts this year.

Key points

• Key points:
• Last week’s 1Q24 advance estimate for real GDP confirmed an extended strength of economic activity driven by services spending and residential investment.
• The labor market continued to score strong job gains in March, but alternative measures of tightness suggest a gradual rebalancing process is still taking place.
• Core PCE inflation came in somewhat hotter than expected in March, rising 0.3% MoM, with the 3-month annualized rate jumping to 4.4%.
• This bump in the road has driven financial markets to price in that the Fed will push back the start of the rate cut cycle to July at the earliest, more likely to the fall.
• FOMC members are likely to formally convey their plan to slow down the pace of its quantitative tightening (QT), probably starting in June.

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