Investors are awaiting the conclusion of the US Federal Reserve’s meeting for guidance about the outlook for interest rates, as doubts emerge as to whether there would be rate cuts in May and how many (if any) can be expected this year.
At the start of the year, most top economists agreed that the May meeting would bring the first announcement of interest rate cuts of 2024, followed by two more later in the year.
Nonetheless, the mood has changed. Now, the general expectation is that the Federal Reserve will maintain the current interest rate at its upcoming meeting.
“The Fed is unlikely to make any interest-rate cuts soon”
Marc Pussard
These expectations stem from industry echoes, which support central bank governors’ view that more evidence is required regarding the notion that inflation is steadily progressing towards the central bank’s target of 2.00%.
“The current focus on Wall Street seems to have shifted from concerns about a soft landing to discussions about the persistence of inflation, leading to expectations of a more prolonged ‘higher-for-longer’ monetary policy,” said Marc Pussard, Head of Risk at APM Capital.
“The Fed is unlikely to make any interest-rate cuts soon, opting instead to maintain tight policy to curb demand and bring inflation back in line with the central bank’s 2% target.”
When it comes to the major Wall Street banks, forecasts on interest rates massively differ, despite a general agreement that they will not be announced in May. JPMorgan and Goldman Sachs expect the first cut in July. Wells Fargo has predicted September cuts, while the Bank of America doesn’t expect the first cut until December.
The first quarter of 2024 saw a notable slowdown in GDP growth in the first quarter. In March, the Federal Reserve’s preferred measure of underlying inflation—the core personal consumption expenditures price index or PCE – increased to 2.7% in March from 2.5% the previous month.
“The potential stabilisation of interest rates, likely influenced by recent economic data, suggests that the Federal Reserve finds itself caught between two conflicting trends,” explained Mohamed Hashad, Chief Market Strategist, at Noor Capital.
“On one hand, there’s a noticeable decline in economic growth, as evidenced by last week’s gross domestic product (GDP) indicators. On the other hand, there’s a persistent uptrend in inflation, as reflected in personal consumption expenditure readings. This juxtaposition poses a dilemma for the Fed, as it weighs the need to support economic expansion against the imperative to curb inflationary pressures.”
Currently, inflation is on pace to hit 4.5% by March 2025, as a result of higher energy prices as well as elevated shelter, medical care and insurance costs, according to data from the Bureau of Labor Statistics. If true, this would double the Fed’s official 2% target.
Charu Chanana, Head of FX Strategy at Saxo Bank, also expressed her view that the Fed will not cut interest rates. However, she highlighted other learnings that could come as a result of the Fed’s decision and statement.
“While no rate change is anticipated, and no dot plot will be released at this meeting, the press conference remains a pivotal event that will influence markets,” Chanana explained. “If Powell reiterates the Fed’s forecast for three rate cuts, that could significantly boost risk sentiment across all asset classes.”
In this scenario, tech stocks are likely to gain, amid broad support for commodities and a weaker USD. However, some Fed members such as Austan Goolsbee have recently hinted at inflation concerns and brought a rate hike back on the table, with the official stating that “progress on inflation has stalled”.
“If that message is reiterated by Powell, we could see further hawkish reactions from the market,” Chanana said. “In this environment of heightened uncertainty, traders are preparing for potential market reactions and adjusting their positions accordingly.”
“Powell’s messaging during the meeting will be under intense scrutiny, particularly for any hints of a pivot from the previously dovish tone”
Charu Chanana
The Fed paused the US interest rate at a range of 5.25% to 5.5% in August last year after raising interest rates 11 times between March 2022 and July 2023. As a result, inflation dropped from its high of 9.1% in June 2022 to 3% one year late, but it has since not been able to drop below the 2% target.
Despite a positive start to the year, many investors have pushed back their expectations of upcoming rate cuts to September or later and economists in Bankrate’s latest quarterly poll warning of the risk that inflation could stay hot until 2026.
The remaining Fed meetings are scheduled for June, July, September, November and December 2024.
