How strong is the dovish expectation? The market prices in 5 interest rate cuts next year.

Unfazed by the pressure, dovish expectations remain hot. The Fedwatch tool of the Chicago Mercantile Exchange shows that expectations for the level of interest rates at the end of next year are mostly concentrated between 4% and 4.35%, which is a 1.25 percentage point rate cut, equivalent to five rate cuts of 25 basis points each. This means that in the eight Federal Reserve interest rate meetings to be held next year, at least more than half of them will announce rate cuts. According to reports, the likelihood of falling below 4% has significantly increased compared to a week ago. However, after Powell poured cold water on rate cuts, market expectations have slightly shifted towards a moderate hawkish stance. As of last Friday, the market believes that the likelihood of interest rates falling below 4% next year is higher compared to other rate levels. Morgan Stanley's stock strategist believes: "From our perspective, the Fed has not really changed its guidance during this period, but the bond market's view is what matters." "By the end of 2024, the federal funds futures market has priced in a 130 basis point rate cut, and investors have set a high threshold for rate cuts." According to reports, strategists speculate that if inflation and the labor market further slow down, the Fed may take more proactive measures. Wall Street News previously mentioned that Bank of America, JPMorgan Chase, and Goldman Sachs have issued warnings about the US stock market, believing that the market's predictions of rate cuts by the Fed have gone too far. Scott Rubner, Managing Director and Senior Derivatives Strategist at Goldman Sachs, pointed out in early November that the US stock market has "exceeded the scope of short covering," and he explained in a recent report that "all the funding dynamics that caused the rebound in November have now been completely exhausted." It is worth noting that strategists believe that the "inertial Taylor rule" is a reference standard. "Inertial" refers to considering the recent path and level of interest rates, while "non-inertial" ignores the past and only considers the recommended interest rate level under the current economic and financial conditions. Media reports quoting Deutsche Bank said that if the US economy does indeed enter a recession, the central bank may switch to a "non-inertial" approach and quickly cut interest rates. In terms of specific paths, the bank believes that the Fed will start cutting rates in June next year, with a total rate cut of 175 basis points, core PCE falling below 3%, and the unemployment rate rising to around 4.5%—more aggressive than market pricing. Deutsche Bank said: Based on a series of predictions using the non-inertial rule, the Fed should cut rates earlier and more aggressively than our forecast.