Bond traders have adjusted their expectations for Federal Reserve policy. The market’s consensus interest rate cut forecast has decreased recently, following the first expansion of U.S. manufacturing activity since 2022. Indeed, solid economic data continues to roll in, complicating the job of the Federal Reserve. Fed rate cuts implied by swap contracts fell below 65 basis points for this year, which is lower than Fed projections. Thus, the market appears to be “taking the under” with respect to how aggressive the Fed will be in cutting rates this year.
That is in stark contrast to earlier market projections, which had penciled in more than a full percentage point of cuts this year. So, investors appear to remain cautious concerning inflation and its relatively sticky impact.
Still, many economists believe improving housing inflation data could tilt the Federal Reserve’s policy stance more dovishly. If housing inflation (which makes up more than a third of the overall CPI reading) comes in lighter than expected in coming months, that could signal a cut sooner than expected.
The jury’s out, but let’s dive into what Jerome Powell thinks and where analysts come in on this question of when (or if) interest rates will get cut this year.
Central Bank Chief Supports Fed Rate-Cut Strategy
Federal Reserve officials, including Jerome Powell, reiterated the importance of thorough deliberation and data analysis before considering interest rate cuts, which markets anticipated in June. Powell noted that recent job gains and inflation readings exceeded expectations, indicating a cautious approach towards rate adjustments until there’s confidence in sustained inflation decline.
His remarks echoed the Fed’s caution in considering rate cuts, weighing the risk of curbing economic growth prematurely. However, uncertainties persist despite ongoing data analysis. Atlanta Fed President Raphael Bostic diverged from his peers, suggesting delaying rate cuts until late 2024 due to inflation fluctuations and expected economic resilience.
While some Fed officials echoed Bostic’s stance, others like Fed Governor Adriana Kugler concurred that recent progress on inflation had been uneven. Kugler anticipated continuing the disinflationary trend, suggesting potential rate cuts in the coming year. However, she refrained from specifying the timing or extent of expected policy easing.
Powell’s remarks at the Stanford event reiterated his previous statements and offered no new insights into monetary policy. He maintained that rates would decrease “later this year,” citing consistent economic growth and inflation nearing the 2% target. However, he refrained from indicating specific timing for policy adjustments, emphasizing the significance of upcoming job and inflation data.
Powell emphasized the importance of upcoming data in shaping policy decisions, stating, “Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy.”
Meanwhile, Kugler noted that recent inflation data showed some firming but suggested caution due to atypical factors, indicating the need to assess the pace of progress toward the 2% target. She highlighted the potential for supply improvements to mitigate inflation pressures, particularly in the services sector.
What Do Analysts Think?
Based on this recent commentary, there’s plenty of room for interpretation when it comes to where interest rate policy will end the year. Analysts share a wide range of views on this topic, with some suggesting interest rates may not be cut at all, particularly if inflation continues to remain sticky for the remainder of 2024.
One notable comment that caught my eye was from Gregory Brown, a professor of finance at UNC. He suggested interest rate cut expectations are “unanchored” and believes the Fed may not cut interest rates at all this year. So long as job growth remains strong, inflation will continue to remain sticky, leading to this view.
Larry Summers, the former Treasury Secretary, also suggested that cutting rates “would be like hitting the accelerator,” with economic growth still remaining strong. He appears to be in a similar camp as Mr. Brown. And with so many eyes on his commentary, the market is clearly taking notice.
Brian Bethune, a professor of economics at Boston College, believes inflation could be on the decline. His view is that supply-related shocks have been concentrated in a few sectors and that while progress on inflation may stall, the Fed will likely cut two times this year.
Bottom Line
The outlook for interest rate cuts is obviously mixed. However, it is interesting to see so many prominent names dial back their expectations for how many times the Fed will cut rates this year. And with increasingly hawkish rhetoric being spewed by certain Federal Reserve officials, such a case may be more likely than not.
That said, I don’t have a crystal ball. I think the Fed will cut rates this year, and am leaning toward one or two cuts near the end of the year. But we’ll see. If housing data comes in weaker than thought, we could be in for more cuts.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
