Fed’s Fast‑Track: How ISM Is Turning the Heat On the FOMC
Every Monday, the ISM manufacturing survey drops a fresh update on the economy that feels like a tiny but serious barometer for what the Federal Open Market Committee (FOMC) is planning this year. And this week, the data plot twists a couple of times—throws a curveball at rate cuts and cranks the cross‑asset volatility up a notch.
What’s Happening With the Fed Funds Rate?
Let’s strip it down using a simple three‑step timeline:
- Jan/Feb – The overnight index swaps (OIS) were pricing more cuts than the dot plot from FOMC delegates.
- Early Mar – Now the OIS and the dot plot are basically on the same page.
- Late Mar/Early Apr – OIS has edged slightly more hawkish than the central bank’s median forecast.
In plain English: “Six 25‑bps cuts were once on the radar, but now only a little less than three are being priced in.” The curve has shifted from the Fed’s earlier emphatic stance to a muted warning that we’re not as bullish on easing as we thought.
Why The Numbers Are Squeezing In
Two big reasons are at play: the economy is tougher than forecasts, and inflation isn’t shedding pace.
- ISM hit 52.3 last month, moving above the critical 50.0 line the first time since September 2022. Economists had all over the place, but the reading surprised us to the upside.
- Prices paid in the manufacturing pill upgrade to 55.8 from 52.5 – the highest since July 2022. This hints that goods inflation is picking up speed while services prices hold tight.
- With food and energy costs dropping, the recessionary pressure from goods has mostly fallen. The stubborn services side means headline inflation might stay jittery.
January and February saw the Consumer Price Index push higher than expected, and since it’s not a one‑off event, the market can’t keep ignoring it as noise. That means the debate over 75 bp vs. 50 bp cuts is heating up once again.
Where Are The Markets Heading?
The chart below (sorry, no image here) tells us that money markets are about 50/50 on the amount of rate cuts at year‑end. OIS has steered the least amount of easing it’s done since the New Year, suggesting a cautious stance.
Out of the 19 FOMC members, 10 want the year‑end fed funds rate at 4.5%–4.75% (meaning 75 bp cuts), while the other nine think it shouldn’t be that low. The Fed Will Be Able to Tweak Policy mantra still rings true.
Upcoming Week: A Cocktail of Data and Voices
- ISM Services (Wed) – If the stubborn price trend in services keeps going, it could signal more inflationary pressure.
- March Job Report (Fri) – A strong headline NFP of +200k would show the labor market still roaring.
- Fed Speeches – 19 speeches lined up, including Powell and NY Fed President Williams. Timed right, a calm message from the Fed could keep traders from overreacting.
The less is more mantra is more critical now. Too many talking heads could muddle the signal and cause the market to flip‑flop.
Takeaway For Investors
At the end of the week, a 50 bp cut scenario becomes realistic. That would be great news for the dollar, as the U.S. Fed leans hawkier while other G10 central banks shift toward dovishness. Stocks and short‑end bonds would feel the tug in the opposite direction.
But remember, the Fed’s cushion—what you might call the “Fed put”—remains in place. For long‑term equity fans, the 50‑day S&P moving average (just shy of 5,100) is a good spot for a dip‑code‑in. If the line tests, buy‑in might happen since investors feel secure knowing that the Fed will support as needed.
Bottom line: stay cool and keep a close eye on the market’s next turn. The world of rates, inflation, and Fed pronouncements is a fun roller‑coaster, so strap in and enjoy the ride.
