Financial markets are currently pricing in a significant and rapid cycle of interest rate cuts by the Federal Reserve starting as early as July, according to the CME data. However, this expectation stands in stark contrast with the prevailing short-term rate market data, which suggests a different trajectory.
What Happened: According to Bob Elliott, the chief investment officer at Unlimited Funds, the current economic indicators provide the Fed, under Chair Jerome Powell, ample justification to maintain its current stance, potentially leaving it to a future leader to initiate the much-anticipated easing cycle.
Elliott highlighted that the consistently stable unemployment rate remains a crucial factor guiding the Fed’s policy decisions. He further pointed out that with significantly slowing labor force growth due to current immigration restrictions, maintaining this stable unemployment rate will require considerably fewer than 100,000 new jobs per month.
Despite a recent weak GDP print, Elliott believes the Fed will likely look past this backward-looking data and focus on forward growth expectations, which are still projected to be around 1.5% for the year, implying over 2% growth for the remainder of 2025. “At that level the Fed has little urgency to cut,” he asserted.
He also suggests aggressive rate cuts are unlikely in the near term without a significant worsening of financial conditions.
Adding a political dimension, while a change in Fed Chair was speculated, Elliot adds that it makes its “up to the next chair to deliver the cutting cycle so desperately desired.”
In contrast to the Fed’s likely patient approach, “Short rates are pricing in a reasonably urgent cutting cycle starting this summer and then hardly any cuts in ’26 right now,” Elliott pointed out. He views this market pricing as “pretty inconsistent with the current data and the likely dovish replacement of JP next year.”
Why It Matters: This divergence between market expectations and the likely Fed path, according to Elliott, presents a potential trading opportunity to “fade the rate path ahead in both directions (short Dec ’25, long Dec ’26).” He concludes that “the STIR market fails to be discounting a stubborn JP and max dovish next chair ahead for now.”
Thus, Elliott concluded that while investors are eagerly anticipating rate cuts in the near term, the underlying economic data and the likely stance of the current Federal Reserve leadership suggest that such aggressive easing may not materialize as quickly as the market is currently projecting.
Price Action: The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, fell in premarket on Monday. The SPY was down 0.81% to $562.17, while the QQQ declined 0.98% to $484.04, according to Benzinga Pro data.
Meanwhile, the CME Group's FedWatch tool‘s projects markets pricing a 98.2% likelihood of the Federal Reserve keeping the current interest rates unchanged in its May meeting. However, a 79.1% chance of a cut is projected after the July meeting, 97.4% after September, 99.1% in October, and a 99.8% chance of a cut in December 2025.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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