The Fed will have to make bigger cuts to keep rates down for longer.
The Federal Reserve's decision to start cutting interest rates on Wednesday High-speed rates are expected to decline.
Wall Street is skeptical that the current policy rate is Very restrictiveEven after this week's half-point rate cut, the current policy stance is considered too tight.
The origins of this view are a bit mysterious. Atlanta Fed Given current inflation and unemployment rates, they suggest that a neutral rate (neither stimulative nor discouraging) would be between 3.5 percent and 4.8 percent. It is currently at the high end of that range, and Fed officials project it will fall to 3.4 percent by the end of next year.
But many analysts at the big banks continue to argue that the Fed is still unnecessarily risking economic recession and higher unemployment. This creates a very strange situation. Wall Street basically agrees with Elizabeth WarrenOn interest rates, the Fed chairman made the case for a 75 basis point cut this week.
Of course, this assumes that the Fed's current stance should be neutral rather than restrictive, a view the Fed itself seems to lean toward. I am confident that inflation will fall to 2%. And an unnecessary weakening of the labor market now poses a bigger risk than a resurgence in inflation.
Chairman of the Federal Reserve System Jerome Powell He himself made it clear that interest rates will continue to fall, and not just slightly, for the foreseeable future.
“The direction is clear, and the timing and pace of any rate cuts will depend on upcoming data, the evolving outlook, and the balance of risks,” the chairman said in his speech. Jackson Hole.
Election pressure for further big cuts
Many on Wall Street are convinced that the Fed is overdue in starting to cut rates. This was the central argument for a 50 basis point cut. If the Fed's current interest rates are too restrictive and rate cuts are already overdue, it may be wise to move quickly toward a neutral rate. This argument is We need multiple 50 basis point rate cuts, not just one.
In a memo sent before the Fed's announcement, Aditya Barve of Bank of America He argued that the idea of the Fed making a one-off 50 basis point cut and then following it up with smaller cuts doesn't make much sense.
“[If] “The goal is to lower rates at a much faster pace than would be possible with 25bp cuts per meeting, which would require the Fed to cut rates by 50bp over two or three consecutive sessions. That means if the Fed cuts 50bp, the median for 2024 would likely indicate a 125bp or 150bp cut. This is more dovish than the market, which is pricing in around 115bp cuts this year as of this writing,” Bave argued.
Bavet also noted that a 50 basis point cut in interest rates just before an election followed by smaller cuts could be politically confusing. If Trump wins the electionA scaling back of the Fed's rate cuts could be seen as an attempt to undermine the new administration's economic growth policies.
“Typically, when Fed policymakers say that political considerations have no influence on their policy decisions, we believe them. But if there is a change of administration in November, an immediate downshift to a 25 basis point cut two days after the election would be problematic in our view,” Babet explains.
It is clear that the Fed has decided to announce a major rate cut. If Barb's analysis is correct, we are probably Similar cuts are expected in November or December..
on the other hand, Powell argued that Wednesday's 50 basis point rate cut should not be seen as a binding precedent. For future reductions.
“I don't think anybody is going to look at this and say, 'This is the new pace,'” Powell said.
However, the futures market Priced for at least 75 basis points of further rate cuts by year-endThis lowers the target rate range to 4.00-4.25%, making a 100 basis point cut less likely, with at least one 50 basis point cut coming in the next two meetings.
The median forecast for Fed officials is for the target range to fall to 4.25% to 4.50%, but futures markets are valuing that as having only a 29% chance of happening. Markets believe the Fed is still too hawkish on Fed policy.
Looking further out, markets are pricing in a much bigger cut in interest rates than Fed officials are expecting. The median forecast for the Fed's policy rate at the end of next year is 3.4%. Futures prices suggest there is only an 85% chance that the policy rate will be lower than that, probably below 3%.
So who is right? Fed Powell Extremely reluctant to set policies that are more hawkish than the market It's priced in. If this continues, the Fed could very well cut rates more than expected this year and next.
