Traders work on the floor of the New York Stock Exchange during morning trading on May 24, 2024 in New York City.
Michael M. Santiago | Getty Images
Investors will likely have to sweat out a summer in which it appears increasingly unlikely that the Federal Reserve will cut interest rates.
A series of stronger-than-expected economic data, coupled with new comments from policymakers, point to near-term policy easing. Traders changed futures prices again this week, moving away from the likelihood of a rate cut in September and now only expecting a cut by the end of the year.
The general reaction was not encouraging, as stocks suffered their worst day of 2024 on Thursday and the Dow Jones Industrial Average broke its five-week winning streak before the Memorial Day break.
“The economy may not be cooling as much as the Fed would like,” said Quincy Krosby, chief global strategist at LPL Financial. “The market takes every bit of data and translates it the way the Fed sees it. So if the Fed is data dependent, the market is likely to be more data dependent.”
Over the last week or so, the data has sent a pretty clear message: Economic growth is at least stable, if not rising, while inflation is omnipresent as consumers and policymakers alike wary of the high cost of living.
Examples include weekly jobless claims, which 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 accelerated the pace of layoffs. Then there was a more subdued survey release on Thursday that showed stronger-than-expected expansion in both the services and manufacturing sectors and purchasing managers reported stronger inflation.
No reason to cut
Both data points came a day after the release of minutes from the Federal Open Market Committee’s latest meeting, suggesting central bankers still lack confidence to cut interest rates, and even a few unnamed ones said , that they could be open to raising interest rates if inflation gets worse.
Additionally, Fed Governor Christopher Waller said earlier in the week that he would need to see several months of data suggesting inflation was easing before agreeing to lower interest rates.
All in all, there is little reason for the Fed to loosen monetary policy here.
“Recent Fedspeak and May FOMC minutes make it clear that positive inflation surprises this year, combined with solid activity, will likely put rate cuts off the table for now,” Bank of America economist Michael Gapen said in a note. “There also seems to be a strong consensus that policy is moving in a restrictive zone, which is why interest rate hikes are probably not necessary.”
Some members of the most recent FOMC meeting, which ended May 1, even wondered whether “high interest rates may have a smaller impact than in the past,” the minutes said.
BofA expects the Fed could wait until December to begin cutting rates, although Gapen noted a number of wildcards that could come into play regarding the mix of a potentially weaker labor market and slowing inflation.
Incoming data
Economists like Gapen and others on Wall Street will be watching closely next Friday when the Commerce Department releases its monthly overview of personal income and spending, which will also include the Personal Consumption Expenditure Price Index, the inflation indicator that draws most of the Fed’s attention .
The informal consensus is for a monthly increase of between 0.2% and 0.3%, but even that relatively muted increase might not give the Fed much confidence to cut. At this rate, annual inflation is likely to remain close to 3%, or still well above the Fed’s 2% target.
“If our forecast is correct, it will [year-over-year inflation] “The interest rate will fall just a few basis points to 2.75%,” Gapen said. “There is little sign of progress toward the Fed’s target.”
The markets agree, albeit reluctantly.
While traders had expected at least six cuts at the start of the year, as of Friday afternoon there was about a 60% chance there would be just one, according to CME Group’s FedWatch tool. Goldman Sachs has pushed back its first expected cuts to September, although the company still expects two this year.
The central bank’s key interest rate has been at 5.25% to 5.50% since July last year.
“We continue to view rate cuts as optional, which reduces the urgency,” Goldman economist David Mericle said in a note. “While Fed leadership appears to share our relaxed view of the inflation outlook and will likely be ready to cut soon, some FOMC participants still appear to be more concerned about inflation and more reluctant to cut.”
Source link
2024-05-25 11:55:03
www.cnbc.com
