This week, markets will receive two important signals about how quickly and by how much the Federal Reserve will cut interest rates. The result could test investors’ patience at a time when there are growing signs that the central bank, which had been expected to aggressively ease monetary policy this year, will instead be more cautious. This is because the most recent Federal Open Market Committee minutes and the latest measurements of the Consumer Price Index are likely to suggest inflation that has not yet been overcome, thus requiring a gradual transition to monetary easing. Body. Both reports are expected to be submitted on Wednesday. “While investors appear to be looking forward to easy monetary policy, the current environment is not enough to scream ‘rate cut!’,” strategists at Glenmede Investment Management said in Monday’s weekly market note. “With a strong labor market, expanding manufacturing, and rising commodity prices, the Fed will be in no hurry to cut rates.” That sentiment has been showing up in market prices lately. Traders had been pricing in up to seven rate cuts this year since the start of the year (assuming quarterly percentage point increments), according to CME Group FedWatch’s federal funds futures market index, but Monday morning’s index showed two to three cuts. It is said that it was a coin toss between the previous interest rate cuts. . “Right time for cuts”? Moreover, at the pricing suggested by the market, there is only a 51% chance that cuts will begin in June, effectively pushing the first move into July. The implied federal funds rate through December is 4.8%, about 0.5 percentage point below Monday’s level. Meanwhile, investors worry that if the Fed is slow to cut rates, it could jeopardize the S&P 500’s 9%+ stock rally in 2024, excluding last week’s sharp selloff. The minutes of the March meeting should show how the FOMC views recent inflation data. On the same day, the Department of Labor released its Consumer Price Index (CPI) report, and according to Dow Jones, all-item inflation is expected to rise to 3.5% in March compared to the same month last year. This compared to his February pace of 3.2%. Core interest rates are expected to decline slightly from 3.8% to 3.7%. Still, now is “a good time to cut rates,” said David Kelly, chief global strategist at JPMorgan Asset Management. Kelly said the “strongest argument” in favor of easing is “the value of normalizing policies before the data shows they are needed.” “Ultimately, it still appears prudent for the Fed to begin cutting rates in June on its current schedule,” he said. “But whether we do so will depend on the monthly inflation rate, especially the CPI numbers in the short term.”Inflation pressures continue, he said.However, other indicators could push the Fed toward a more defensive approach. there is a possibility. Average hourly wages rose an additional 0.3% in March and 4.1% from a year earlier, according to the Labor Department, but still well above the pace the Fed considers consistent with its 2% inflation target. Although there are various views on the causal relationship between wages and inflation, the fact that wages remain relatively high is a deterrent to action. Over the past two years, wage growth has slowed by less than 0.1% per month. That means it will take another 14 months for wage growth to reach the 3% annual pace that is in line with the Fed’s overall inflation target, said Nicholas Colas, co-founder of DataTrek Research. “The slow pace of reductions in wage growth is a key reason why markets are right to reassess when the Fed’s first rate cut will occur and how many cuts it will make over the next 12 months,” Collas said. ” he said. “We still think the first rate cut will be in July unless the inflation data surprises us with a big upside.” One bright side of the Fed not cutting rates is that higher interest rates will slow economic growth less severely. This is something that officials claim they can afford to be patient with because they have not allowed the government to do so. But this is a good news, good news scenario that the market has been slow to accept. “The only reason to cut rates here is if you truly believe that the tight monetary policy of the past two years is still weighing on the economy for the rest of the year, without any evidence that this is actually the case.” said a market veteran. Ed Yardeni, director of Yardeni Research, said in a recent interview. Markets rose after Friday’s better-than-expected nonfarm jobs report, indicating some peace of mind in the strengthening economy that drives interest rates higher. However, Monday’s early gains disappeared due to the fickle nature of futures traders when pricing in the possibility of a rate cut. A potential long-term source of relief could come from the upcoming corporate earnings season, said Quincy Crosby, chief global strategist at LPL Financial. S&P 500 earnings rose 3.2% in the first three months of the calendar year and are expected to increase further thereafter, for a full-year growth rate of 10.9%, according to FactSet. “The market was supported by a series of rate cut promises, including in March, but that has now been reduced to just a few rate cuts.The question is, what if there was only one rate cut? It’s about what happens if the Fed doesn’t cut rates.”Won’t they cut rates? What will happen to the market? ” Crosby said. “Well, you need someone to replace you, and that replacement can easily make more money than you expected.”
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