This is our Club Mailbag email investingclubmailbag@cnbc.com — so you should send your questions directly to Jim Cramer and his team of analysts. We cannot offer personal investment advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. This week’s question: CNBC guests often say six Fed cuts are priced into the market by 2024. How do they know? Is it just their opinion? Do they have some calculation or is this just a pitch to support some bearish investment strategy? – Mike H. When you hear about the number of Federal Reserve interest rates that are priced into the market, the data comes from the CME FedWatch tool. This tool, which exploits data from the prices of futures contracts, can be used to determine the probability of a cut (or increase) in the near term, such as the next meeting, or where rates could be headed during the coming year. The overnight fed funds rate is the rate that everyone refers to when talking about Fed rate moves. The current range is 5.25% to 5.5% after 11 rates from March 2022 to July 2023. There was a pause at the June, November and December meetings. As for cuts being “priced in” throughout the year, this is determined by where the market predicts the Fed target rate will be by year-end in December. Taking a look at the CME FedWatch tool, as of this writing and ahead of Wednesday afternoon’s Fed rate decision and central bank chief Jerome Powell’s news conference, it shows the probability of various targets by December 2024. How can we see, the highest probability. , about 40%, is attributed to the 375 to 400 basis point cut range by year-end. Each cut amounts to a 25 basis point, or 0.25 percentage point, reduction to the range. One hundred basis points equals 1 percentage point. So, if the current fed funds range is 5.25% to 5.5%, as we can see right above the chart, then the implication is that the Fed will cut by 150 basis points, or 1.5 percentage points in 2024. This is where the six points . 25 basis point cuts come from. If you follow the link above, you will be able to select any month that the Fed has a meeting and run this same analysis to determine how many cuts the market thinks we will see by the conclusion of the meeting in that given month. . Going into the January meeting, we can see that the market is placing almost 94% probability on the Fed holding rates at the current range after the January meeting. That’s down from the roughly 98% we saw on Tuesday. Perhaps, it’s because of the weaker-than-expected ADP private-sector employment report on Wednesday morning. In addition to utilizing this data to understand what the market is considering, you should compare it to your own perspective. You may have heard us say things like the market is trading on Fed rates. What we mean is that the estimation models used to find appropriate price levels take into account six cuts. If you think that’s too much, then you’d want to be more careful, because that would mean that the market is getting ahead of itself by pricing in a lower rate faster than it will materialize, according to your own worldview. The opposite can also be true. However, remember, while the general view is that lower rates are better for stocks, given the impact on multiples and discount rates in discounted cash flow models, the more important question is why rates are where they are. Are they low because inflation has come down and the economy is still soaring (bullish) or are they low because the economy is picking up (more, sub-optimal as Jim Cramer would say)? (See here for a full list of INJim Cramer’s Charitable Trust holdings.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling shares in his charitable trust’s portfolio. If Jim talked about a supply on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR RESPONSIBILITY. NO FIDUCIARY OBLIGATION OR OBLIGATION EXISTS, OR IS CREATED, BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT IS GUARANTEED.
This is our Club Mailbag email investingclubmailbag@cnbc.com — so you should send your questions directly to Jim Cramer and his team of analysts. We cannot offer personal investment advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries.
This week’s question: CNBC guests often say six Fed cuts are priced into the market by 2024. How do they know? Is it just their opinion? Do they have some calculation or is this just a pitch to support some bearish investment strategy? – Mike H.