Musalem predicts that growth this year will be below the long-term average. He acknowledges the potential impact of tariffs on inflation and the current state of the labour market.
Higher inflation combined with a weaker labour market aligns with existing projections. He warns that if inflation expectations fluctuate, efforts to control inflation may need to take precedence.
Fed Funds Market Projections
The Fed funds market reflects a 93% likelihood of a rate cut in June, indicating about 92 basis points for the upcoming year. These figures underline the prevailing economic uncertainty.
That growth may fall short of the historical trend this year, as Musalem anticipates, suggests we are looking at an environment where cyclical momentum is fading. He’s drawing attention to the pressure that trade measures, such as tariffs, can place on prices. As these costs increase, they tend to feed through to consumer inflation. Meanwhile, the labour market appears to be flattening out. It’s not deteriorating sharply, but signs of softness are present—fewer job openings and slower hiring point to reduced confidence among firms.
When the cost of living rises while the jobs engine starts to run cooler, policymaking becomes harder. Musalem’s reference to inflation expectations shows concern. If people start believing prices will rise faster in future, they may behave in ways—like demanding higher wages or front-loading purchases—that drive inflation even higher. In that case, central banks would feel pressure to act more quickly, even if economic growth isn’t strong.
We see this tension clearly reflected in current rate expectations. The probability of a rate cut as early as June is now very high—markets are almost fully pricing it in. The expected drop across the next 12 months, close to one percentage point, also shows how investors think monetary authorities will respond to softer data and contained inflation over time.
Monitoring Rate Movements
For those of us monitoring short-term rate movements, these updates require a sharper focus on incoming data—especially anything that points to wage trends, input costs, or consumer resilience. Volatility around upcoming inflation releases may rise. It would not be surprising to see sudden shifts in the curve, particularly if forward-looking indicators surprise on the upside.
Positioning needs to remain flexible. Temporary dislocations in pricing could provide entry points, but we should avoid chasing market reactions. Instead, lean on forward guidance, especially commentary on thresholds for policy responses. Lagging indicators are less useful right now. Primary attention should go to real-time job postings, small-business hiring surveys, and key inflation components like shelter and healthcare.
There will likely be more weight given to data surprises over the next two or three months, given the high expectations priced into the front-end. Market belief is strong, perhaps even leaning a little too far ahead of confirmation. That gap between conviction and verification is where traders may find room for returns—or risks, if caught misaligned.
As rate cut expectations settle in, the immediate focus should be identifying which pieces of data still hold sway over the Fed’s reactions. It is also prudent to consider geopolitical feedback loops and their measured influence on commodities and trade-sensitive pricing. Inflation in that sense may not move in one direction, but in fits and starts.
So we watch the reactions, the language from policymakers, and the degree to which markets already reflect these risks. Small shifts in tone or data can have outsized influence. That’s where tactical preparation matters—and why the next set of inflation prints, labour cost indices and core PCE numbers deserve our full attention.
