Wall Street retreats from rate cut hopes
Wall Street is finally coming to terms with interest rates likely staying high for a long time, but it may still be underestimating them. Height and Length.
In February, All the big Wall Street banks and forecasting firms had predicted a rate cut. Of the 18 companies surveyed in the first half of this year, The Wall Street JournalSix expect the Fed to cut rates in May, while the rest see the first cut in June, according to Nick Timiraos, a Fed watcher at FTSE.
No bank predicted rate cuts of less than 75 basis points this year. Seven firms had expected a 75 basis point cut. Three firms predicted a 100 basis point cut, six a 125 basis point cut and one a 175 basis point cut, while UBS made an unusual prediction of a 250 basis point cut.
In the months since, forecasts have changed dramatically. Thimiraos’s latest list puts 21 firms in line for a Fed rate cut. With Goldman Sachs shifting its forecast to September on Friday, only three firms — JPMorgan, MUFG and Citigroup — now expect a cut in July. (No one sees a cut in June.) Ten firms expect rate cut at September meetingFive firms expect the first rate cut to come in December, while three expect the Fed to wait until next year.
Of course, delaying the date of the first rate cut means delaying the total number of cuts this year. Seven firms are expecting a 25 basis point cut, and another seven are expecting a 50 basis point cut. JPMorgan and Morgan Stanley see the Fed cutting rates by 75 basis points. Citigroup still expects a 100 basis point cut.That translates into a quarter-point cut per meeting starting in July. MUFG is looking at a 125 basis point cut. And of course the three firms that see the Fed waiting until next year are looking at 0 basis points of cuts.
With Goldman Sachs changing its forecast for a Fed rate cut to September, most sell-side bank forecasters and other Fed tip sheets now see the first rate cut coming in September, with the next most likely coming in December. pic.twitter.com/OQr8zVTMqQ
— Nick Timiraos (@NickTimiraos) May 24, 2024
Due to careful consideration, cuts in November and September are excluded.
What is noteworthy is No Wall Street forecaster expects the Fed to cut interest rates at its November meeting.The meeting comes two days after Election Day, and Wall Street economists seem right to expect the Fed will not want to change its interest rate policy at a time when markets and politics are likely to be extremely volatile. Given the turmoil surrounding the last few presidential election cycles, when the Fed meets in November, it may not even know who won the election.
President Joe Biden delivers a speech in Washington, DC on May 15, 2024. (Tia Dufour/Department of Homeland Security via Flickr)
Similar concerns about healthy central banks September cuts deniedBarring an unexpected economic crisis, there is little that a September rate cut could accomplish that a December rate cut couldn’t. With Biden vociferously pushing for the Fed to cut rates, a rate cut just before the election would necessarily be seen as inappropriate political bias. Why risk being accused of trying to interfere in the election when the Fed has an opportunity to cut rates again in three months? A 12-week delay is unlikely to change the direction of the economy, especially given the Fed’s view that interest rate changes affect the economy with a long and variable lag.
It probably won’t take much to upset anyone’s mind about a rate cut this year, especially those who are currently predicting one in December. Bank of America’s Michael GapenThe Fed, for example, appears all but ready to give up on a December rate cut, writing in a Friday note that “recent Fed comments and the May FOMC minutes clearly signal that the combination of this year’s upside surprise for inflation and robust economic activity makes a rate cut likely not an option for now.”
The unseen spectre of rate hikes haunts the Fed
Most of Wall Street remains convinced that a rate hike is almost zero chance. But doubts are slowly beginning to creep in. Analysts have said that while they believe the bar for a rate hike is very high, they no longer believe it’s impossible. For example, Gapen’s note said that “rate hikes would likely only occur if inflation (or inflation expectations) rise substantially.” Given that S&P Global U.S. PMIs showed rates were lower in May than in 2017, Fastest economic expansion in two years And with the resurgence of manufacturing, we may be heading in just that direction.
I’ve said this in the past. The Federal Reserve must start preparing the public for a possible interest rate hike.This is to allow the market to internalize the risk of rising interest rates and to minimize the political backlash that could result from a sudden reversal of current plans and immediately starting to cut interest rates.
Federal Reserve Chairman Jerome Powell answers questions during a press conference on May 1, 2024. (U.S. Federal Reserve Board via Flickr)
Imagine the political explosion that would be caused by the Federal Reserve unexpectedly announcing an interest rate hike during a re-elected presidential election. President Trump’s First Term Back in the White HouseEven if economic conditions warrant the move, it will surely be interpreted by many Trump supporters as a retaliation against the president, especially given that the Fed had all but committed to cutting interest rates through the final year of Biden’s first term.
Fortunately, the Fed is starting to signal that a rate hike is a real possibility, with minutes from the last Fed meeting revealing that “various participants” had signaled the possibility of a rate hike. Be prepared to raise interest rates if inflation goes in the wrong directionMore warnings of this kind would soften the shock and political backlash if the Fed finds itself in a position where it has to raise rates next year.
