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Weekly Market Update

How Long Is a Rate Cut Cycle?

Head of North American Investment Strategy & Research

Insight of the Week

The recent string of hotter-than-expected inflation prints has surprised the market and pushed away expectations for the first rate cut. While the May rate cut is essentially off the table, the expectation of a rate cut in June is also dimming. As of 22 April, 2024, the probability of a rate cut in the month of June is 16.5%, down from 57% before the March inflation print release.

It has been more than nine months since the last rate hike in July 2023. The chart above shows the duration between the last rate hike and the first rate cut of the Fed monetary policy cycle since 1989. Each cycle is different, with varying duration, with the shortest gap of around 3 months in 1989 and the longest around 18 months in 1997/98. On average, the Fed takes around 8.7 months from last rate hike to initiate rate cuts. However, for the current cycle, given inflation not cooling down quite as expected, a labor market showing no signs of weakness, and a surprisingly strong US economy, the Fed is forced to keep interest rates higher for longer.

Recently, Chair Powell even suggested a delay in rate cuts. While we agree the Fed has some room to delay, we still believe June-July as the ideal window for initiating the rate cuts, June being the best. In our recent piece “The Problem With Too Long of a Fed Delay?” our Chief Economist Simona Mocuta discusses the possibility of a summer rate cut, and thinks if the Fed delays further, it will be harder to start the rate-cutting cycle during the fall, given elections and difficult base comparisons.

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