That dynamic, which has played out repeatedly over the course of a U.S. central bank policy tightening regime that began 18 months ago, was back on full display last week.
Meanwhile, interest rate futures contracts continue to price in only about a 50% chance of further tightening in 2023, and see a 4.65% policy rate by the end of next year. Here are three reasons why financial markets may be betting on more rate cuts next year than Fed policymakers say is likely to be in the cards:Inflation by the Fed's preferred measure, the personal consumption expenditures price index, peaked in the summer of 2022 at 7% and had fallen to 3.3% this past July. With non-housing services inflation still sticky, Fed officials project underlying inflation pressures will ease only slowly from here.
"We continue to expect a faster pace of fed funds rate cuts than what the Fed currently projects, as we're anticipating a faster pace of inflation reduction," said Preston Caldwell, chief U.S. economist at Morningstar, predicting core PCE inflation will drop to 1.9% by the end of next year.