The Federal Reserve officials began a two-day policy meeting on Tuesday, April 30. The market generally expects the Fed to keep interest rates unchanged for the sixth consecutive time. However, there is also market attention on when the Fed intends to cut rates.
Analysts are hoping that the Fed can provide some much-needed clarity on the expectations for the coming months. This guidance is crucial for market observers who have differing views on interest rates.
According to reports from CNN, major Wall Street banks have widely varying predictions for the first rate cut: JPMorgan Chase and Goldman Sachs foresee the first rate cut in July, while Wells Fargo is betting on September, and Bank of America expects the first rate cut in December. Meanwhile, some Fed policymakers have even raised the possibility of raising rates instead of cutting them.
Based on futures market data, the best bet on the timing for the first rate cut is in September, and the magnitude is expected to be small. The CME Group’s FedWatch tool shows that the probability of a rate cut in September is around 44%, with a lower likelihood of the first rate cut in November.
Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, stated in a recent interview with CNN that it seems like everyone is making predictions on when the rate cuts will begin.
Sonders emphasized the need to analyze what might happen between now and when the Fed starts cutting rates.
Fed economists often mention that their forecasts have a “high degree of uncertainty.” This uncertainty seems to have intensified recently. After a significant decline in inflation throughout 2023, inflation exceeded expectations in the first quarter of this year, which could delay rate cuts by the Fed and force investors who previously anticipated rate cuts in the spring to readjust their forecasts.
A series of higher-than-expected inflation figures are concerning in themselves, but the latest GDP data released last week has also raised concerns about stagflation. As the first-quarter GDP will undergo two revisions in the coming months, it is too early to determine if the U.S. economy is truly experiencing stagflation.
This further adds to the confusion surrounding the overall health and trajectory of the U.S. economy. Nevertheless, the Fed continues to focus on addressing inflation, as the labor market remains one of the strongest markets historically. The employment report released by the U.S. Department of Labor on April 5 showed a surprising addition of 303,000 non-farm jobs in March, well above expectations, with an unemployment rate of 3.8%, in line with expectations. Economists believe that the March employment report provides little reason for the Fed to cut rates, and may even spark discussions of further rate hikes.
Kathleen Grace, CEO of Fiduciary Family Office, stated in a briefing on April 29, “We believe that if inflation persists until May, we are unlikely to see a rate cut before July or September.”
In early April, Federal Reserve Chair Jerome Powell emphasized during a speech at the Stanford Graduate School of Business that Fed officials are not in a rush to ease monetary policy. He noted that regarding inflation, it is too early to judge whether recent data merely indicates a fluctuation.
However, he also mentioned that despite the recent strong employment growth and inflation data surpassing expectations, there has been no “material change” in the overall situation. Powell reiterated his expectations that it might be appropriate to begin rate cuts “at some point this year.”
Atlanta Fed President Raphael Bostic expressed concerns about the pace of inflation in an interview with CNBC on April 3, stating that he believes rate cuts will only happen later in the year, and possibly only once.