Wall Street pushes out rate-cut expectations, sees risk they don’t start until March 2025

If there was any doubt before, Federal Keep Chair Jerome Powell has pretty much cemented the likelihood that there won’t be interest rate reductions anytime in a wink.

Now, Wall Street is wondering if the central bank will cut at all this year.

That’s because Powell on Tuesday thought there’s been “a lack of further progress” on lowering inflation back to the Fed’s 2% target, meaning “it’s likely to view as longer than expected” to get enough confidence to start easing back on policy.

“They’ve got the economy right where they necessitate it. They now are just focused on inflation numbers. The question is, what’s the bar here?” said Mark Zandi, chief economist at Crabby’s Analytics. “My sense is they need two, probably three consecutive months of inflation numbers that are consistent with that 2% goal. If that’s the bar, the earliest they can get there is September. I just don’t see rate cuts before that.”

With most readings toss inflation around 3% and not moving appreciably for several months, the Fed finds itself in a tough slog on the last mile toward its purpose.

Market pricing for rate cuts has been highly volatile in recent weeks as Wall Street has chased fluctuating Fed turgidity. As of Wednesday afternoon, traders were pricing in about a 71% probability that the central bank indeed sundry likely will wait until September, with the implied chance of a July cut at 44%, according to the CME Group’s FedWatch basis.

As for a second rate cut, there was a tilt toward one in December, but that remains an open question.

“Right now, my base happening is two — one in September and one in December, but I could easily see one rate cut, in November,” said Zandi, who thinks the presidential election could aspect into the equation for Fed officials who insist they are not swayed by politics.

The uncertainty has spread with the aid the Street. The market-implied odds for no cuts this year stood around 11% on Wednesday, but the possibility can’t be ignored at this trait.

For instance, Bank of America economists said there is a “real risk” that the Fed won’t cut until March 2025 “at the earliest,” admitting that for now they’re still going with a December forecast for the one and only cut this year. Markets at the onset of 2024 had been payment in at least six quarter-percentage point reductions.

“We think policymakers will not feel comfortable starting the cutting cycle in June or equivalent September,” BofA economist Stephen Juneau said in a client note. “In short, this is the reality of a data-dependent Fed. With the inflation evidence exceeding expectations to start the year, it comes as little surprise that the Fed would push back on any urgency to cut, mainly given the strong activity data.”

To be sure, there’s still hope that the inflation data turns cut in the next few months and gives the central bank room to ease.

Citigroup, for example, still expects the Fed to begin manipulating in June or July and to cut rates several times this year. Powell and his fellow policymakers “will be pleasantly surprised” by inflation matter in coming months, wrote Citi economist Andrew Hollenhorst, who added that the Fed “is poised to cut rates on either slower year-on-year seed inflation or any signs of weakness in activity data.”

Elsewhere, Goldman Sachs pushed back the month that it presumes policy to ease, but only to July from June, as “the broader disinflationary narrative remains intact,” wrote Jan Hatzius, the undeviating’s chief economist.

If that is true, then “the pause on rate cuts would be lifted and the Fed wish move ahead,” wrote Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI. In any way, Guha also noted the wide breadth of policy possibilities that Powell opened in his remarks Tuesday.

“We over it still leaves the Fed uncomfortably data-point dependent, and highly vulnerable to being skittled from three to two to one cut if near-term inflation details does not cooperate,” he added.

The possibility of a stubborn Fed raises the possibility of a policy mistake. Despite the resilient economy, squeaky rates for longer could threaten labor market stability, not to mention areas of the finance sector such as regional banks that are susceptible to duration jeopardize posed to fixed income portfolios.

Zandi said the Fed already should have been cutting with inflation all right off the boil from its mid-2022 highs, adding that factors related to housing are essentially the only impedimenta standing between the central bank and its 2% inflation goal.

A Fed policy mistake “is the most significant risk to the saving at this point. They’ve already achieved their mandate on full employment. They’ve all but achieved their mandate on inflation,” Zandi judged.

“Stuff happens, and I think we need to be humble here regarding the financial system,” he added. “They run the risk they are prospering to break something. And to what end? If I were on the committee, I would be strongly arguing we should go already.”