In December, the Federal Reserve turned its focus towards potential rate cuts in 2024 as inflation continued its steady decline towards the policymaker’s 2 percent target. While the Fed was forecasting three 25 basis point rate cuts in 2024, the market was aggressively pricing in up to six such cuts. Fast forward to today, a string of disappointingly firm inflation reports in the face of a surprisingly strong economy supported by a vibrant labor market, the prospect of any rate cuts this year is rapidly disappearing.

At the start of the year, Fed officials were optimistic that inflation would continue to trend lower, needing just a few more months of data to gain confidence that the end game was in sight. However, recent comments from Fed Chair Jerome Powell clearly refute this outlook stating, “The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence.” The Consumer Price Index has topped forecasts in each of the first three months this year, evidence of an economy and labor market that have yet to buckle under the strain of higher rates.

While the market still anticipates one or two rate cuts from the Fed later this year, there are growing concerns that monetary policy may not be restrictive enough to reign in aggregate demand which has kept inflation elevated. In addition, financial conditions loosened last fall as the Fed signaled a willingness to cut rates, which in turn is a catalyst for growth. Now that the Fed is pushing back and showing more resolve, the market has taken notice. As a result, rates are higher along the yield curve. Whether or not they have peaked remains to be seen.