Five months ago, Wall Street economists were aggressively revising expectations for rate cuts in 2024 as some believed a series of strong inflation readings in the winter would lead the Fed to hold rates steady throughout the year.
Now, that calculus has changed dramatically.
Softer inflation in the spring brought the prospect of a rate cut in September or December into focus, and the last month of data has made clear that rate cuts are coming this fall.
Now, the conversation is about the magnitude of September's rate cut — 25 or 50 basis points? — and what the rest of the year has in store rather than "will they or won't they."
They will.
And one of the leading voices on the Street when it comes to what the Fed ought to do next is Neil Dutta, an economist at Renaissance Macro, who wrote in an email on Friday that a new "reasonable baseline" for Fed cuts this year is 100-125 basis points.
Indeed, data from the CME Group on Friday showed investors pricing in a 60% chance of a 50 basis point cut next month, which already gets you halfway there.
Take the rate cut conversation alongside Friday's stock market action, which saw the Nasdaq enter a correction and investors take a squarely risk off pose, and it seems the environment has become quite charged in just a few weeks.
But while the Fed perhaps missed a window on Wednesday to be aggressive in cutting rates, this need not constitute a gross policy failure.
"The Fed stepped on a nail," Dutta wrote. "Thankfully, they have not stepped on a bed of nails."
"What we are dealing with now is the result of monetary policy being too tight. This means the solution is quite simple. Move policy to a less restrictive stance. If that does not work, keep doing more until the ship course corrects."
When the stock market is making a big whooshing sound and the Sahm Rule is being triggered, things can feel quite perilous. But an economic slowdown is what the Fed had hoped to engineer all along. Now, it has arrived.