Count Down to Rate Cuts (and Hikes)

Market expectations have established a high bar for central banks' rate cuts. Any disappointment like stronger inflation or economic growth could spark market volatility.

The central banks in the eurozone, China, Japan, and Canada met last week. The U.S. Federal Reserve and the Bank of England are meeting this week. No policy changes so far—but are we getting close?

It's a Mad (-Lib) world

Time spent analyzing central bankers' messages is all about the seemingly subtle details. It reminds me of Mad Libs,® the word game where one player asks others for a list of adjectives, verbs, and nouns to substitute for blanks in a story before reading it aloud. The often-hilarious outcomes result from the power of word choice; the change of a word can change the meaning of the entire story and possibly spark a wild reaction.

Central bankers recognize that word choice has the power to move the markets—sometimes wildly, which is why they are intentional and exacting in their communications. For example, they may settle on using a slightly firmer adjective than in their last missive to describe a change in the economic environment or their confidence in achieving a particular objective. The desired result is to nudge market expectations toward an intended direction without triggering a big surprise market reaction when a policy change is eventually made.

Taking it back

The first half of January seemed like the return of a Christmas gift after the holidays; stock markets took back the gains from Santa Claus rally on signs of a later start to rate cuts from policymakers given strong economic data. The chart below shows how the market has been reevaluating the number of rate cuts by some major central banks in 2024. It may be no coincidence that as we heard from these policymakers last week, stock markets stabilized.

Market expects fewer rate cuts in 2024 now than on January 1