Traders work on the New York Stock Exchange trading floor during early trading on May 24, 2024 in New York City.
Michael M. Santiago | Michael M. SantiagoGetty Images
Investors may have to struggle through the summer, during which a rate cut by the Federal Reserve appears increasingly unlikely.
A slew of stronger-than-expected economic data, coupled with fresh comments from policymakers, suggest there won’t be any easing in the near term. This week, traders again adjusted futures pricing, no longer considering the possibility of a rate cut in September, but instead expected only one rate cut by the end of the year.
The broader reaction was less than pleasant, with stocks having their worst day of 2024 on Thursday, with the Dow Jones Industrial Average snapping a five-week winning streak before the Memorial Day holiday.
“The economy may not cool down as much as the Fed hopes,” said Quincy Krosby, chief global strategist at LPL Financial. “The market takes every piece of data and translates it into a Fed view. So if If the Fed relies on data, then the market may be even more dependent on data.”
Over the past week or so, the data have sent a very clear message: Economic growth is, if not rising, then at least stable, while inflation is ever-present as consumers and policymakers alike remain wary of the high cost of living.
Weekly jobless claims, for example, reached their highest level since late August 2023 a few weeks ago but have since fallen back to a trend that suggests companies have not yet accelerated the pace of layoffs. A low-key survey released Thursday showed the economy was stronger than expected Expansion of services and manufacturing Purchasing managers report stronger inflation.
No reason to cut
Both data points were released a day after Minutes from the last Federal Open Market Committee meeting showed that central bankers still lack the confidence to cut interest rates, with a few even saying they might be open to raising rates if inflation worsens.
In addition, Fed Governor Christopher Waller said earlier this week that he would need to see several months of data showing that inflation is slowing before agreeing to lower interest rates.
To sum up, there is not much reason for the Fed to relax policy here.
“Recent Fed speeches and the May FOMC minutes clearly indicate an unexpected rise in inflation this year, coupled with solid economic activity,” Bank of America economist Michael Gapen said in a note. , a rate cut may not be considered at this time. “There also seems to be a strong consensus that policy is within a restrictive range, so a rate hike may not be necessary either. “
The minutes of the meeting stated that the most recent FOMC meeting ended on May 1, and some members even wondered whether “the impact of high interest rates might be less than in the past.”
Bank of America believes the Fed will likely wait until December to start cutting interest rates, but Gabon noted that there are some wildcards that could come into play in the mix between underlying weakness in the labor market and slowing inflation.
Incoming data
Economists such as Gabon and other Wall Street economists will be watching closely next Friday, when the Commerce Department releases monthly personal income and spending data, which also includes the personal consumption expenditures price index, the Fed’s most closely watched report. Expansion indicator. .
The informal consensus is for a monthly increase of between 0.2% and 0.3%, but even a relatively modest increase may not give the Fed much confidence to cut interest rates. At this pace, annual inflation is likely to remain just under 3%, or still well above the Fed’s 2% target.
“If our forecast is correct, the (year-on-year inflation) rate will fall by just a few basis points to 2.75%,” Gapon said. “There is little sign of progress on the Fed’s goals.”
The market agreed, albeit reluctantly.
According to the agency, traders had expected at least six price cuts at the beginning of the year, but the probability of pricing on Friday afternoon was about 60% and there is now only one price cut. CME Group’s FedWatch Tool. Goldman Sachs postponed its first rate cut forecast to September, although the firm still expects two rate cuts this year.
The central bank’s benchmark federal funds rate has been held between 5.25% and 5.50% since July last year.
“We continue to view rate cuts as optional, which lessens the urgency,” Goldman Sachs economist David Mericle said in a note. “While Fed leadership appears to agree with our outlook for inflation, “We have a loose view and may be ready to cut interest rates soon, but some FOMC participants still seem more worried about inflation and less willing to cut rates.”
About The Author
