It is unlikely that the Federal Reserve would lower interest rates throughout the summer, therefore investors will probably have to endure a sweaty summer.
A slew of better-than-expected economic statistics and new policymaker rhetoric indicate away from any policy relaxation in the near future. This week, traders adjusted the pricing of futures once again, abandoning the expectation that rates would be lowered in September in favour of only one decrease by year's end.
The overall response was unfavourable, as the Dow Jones Industrial Average snapped a five-week winning streak before of the Memorial Day holiday, and markets saw their worst day of 2024 on Thursday.
“The economy may not be cooling off as much as the Fed would like,” said Quincy Krosby, chief global strategist at LPL Financial. “The market takes every bit of data and translates it to how the Fed sees it. So if the Fed is data dependent, the market is probably more data dependent.”
The statistics over the past week or two has conveyed a rather clear message: inflation is a constant as consumers and policymakers alike continue to be mindful of the high cost of living, but economic growth is at least steady, if not rising.
For instance, weekly unemployment claims reached their highest point since late August 2023 a few weeks ago, but they have since fallen back to a pattern that suggests businesses have not increased the rate of layoffs. Subsequently, a less well-known study was made public on Thursday, revealing both the manufacturing and services sectors had expanded more than anticipated, and procurement managers had reported higher inflation.
The two data figures were released a day after the minutes of the most recent Federal Open Market Committee meeting were made public. The minutes showed that central bankers still lacked the confidence to make cuts, and some of them even hinted that they may consider raising rates if inflation worsened.
Furthermore, earlier in the week, Fed Governor Christopher Waller stated that before he would consent to decrease rates, he would need to see evidence spanning several months that showed inflation was decreasing.
When all is considered, there is little rationale for the Fed to be loosening policy at this time.
“Recent Fedspeak and the May FOMC minutes make it clear that the upside inflation surprises this year, coupled with solid activity, are likely to take rate cuts off the table for now,” Bank of America economist Michael Gapen said in a note. “There also seems to be strong consensus that policy is in restrictive territory, and so hikes are probably not necessary either.”
According to the minutes of the most recent FOMC meeting, which ended on May 1, some participants even questioned if "high interest rates may be having smaller effects than in the past."
BofA believes the Fed could hold off on making cuts until December, but Gapen pointed out that there are a lot of unknowns that might affect how the labour market's possible weakening and inflation's slowing interact.
Next Friday, when the Commerce Department releases its monthly report on personal income and spending, which also includes the personal consumption expenditures price index—the inflation indicator that the Fed is most interested in—economists like Gapen and others on Wall Street will be closely watching.
Although there is a loose agreement on a monthly rise of 0.2% to 0.3%, the Fed may not feel confident enough to make any cuts despite even that little improvement. At that rate, yearly inflation would probably remain substantially over the Fed's target of 2%, hovering around 3%.
“If our forecast is correct, the [year-over-year inflation] rate will drop by only a few basis points to 2.75%,” Gapen said. “There is very little sign of progress towards the Fed’s target.”
According to the CME Group's FedWatch Tool, prices on Friday afternoon increased to a roughly 60% possibility that there would now be only one cut, although traders had been expecting at least six at the beginning of the year. Although the company still anticipates two cuts this year, Goldman Sachs pushed down its first projected decrease to September.
Since last July, the benchmark fed funds rate set by the central bank has fluctuated between 5.25% and 5.50%.
The urgency is lessened, according to Goldman economist David Mericle, who said in a note, "We continue to see rate cuts as optional."
“While the Fed leadership appears to share our relaxed view on the inflation outlook and will likely be ready to cut before too long, a number of FOMC participants still appear to be more concerned about inflation and more reluctant to cut.”
(Source:www.forexfactory.com)
A slew of better-than-expected economic statistics and new policymaker rhetoric indicate away from any policy relaxation in the near future. This week, traders adjusted the pricing of futures once again, abandoning the expectation that rates would be lowered in September in favour of only one decrease by year's end.
The overall response was unfavourable, as the Dow Jones Industrial Average snapped a five-week winning streak before of the Memorial Day holiday, and markets saw their worst day of 2024 on Thursday.
“The economy may not be cooling off as much as the Fed would like,” said Quincy Krosby, chief global strategist at LPL Financial. “The market takes every bit of data and translates it to how the Fed sees it. So if the Fed is data dependent, the market is probably more data dependent.”
The statistics over the past week or two has conveyed a rather clear message: inflation is a constant as consumers and policymakers alike continue to be mindful of the high cost of living, but economic growth is at least steady, if not rising.
For instance, weekly unemployment claims reached their highest point since late August 2023 a few weeks ago, but they have since fallen back to a pattern that suggests businesses have not increased the rate of layoffs. Subsequently, a less well-known study was made public on Thursday, revealing both the manufacturing and services sectors had expanded more than anticipated, and procurement managers had reported higher inflation.
The two data figures were released a day after the minutes of the most recent Federal Open Market Committee meeting were made public. The minutes showed that central bankers still lacked the confidence to make cuts, and some of them even hinted that they may consider raising rates if inflation worsened.
Furthermore, earlier in the week, Fed Governor Christopher Waller stated that before he would consent to decrease rates, he would need to see evidence spanning several months that showed inflation was decreasing.
When all is considered, there is little rationale for the Fed to be loosening policy at this time.
“Recent Fedspeak and the May FOMC minutes make it clear that the upside inflation surprises this year, coupled with solid activity, are likely to take rate cuts off the table for now,” Bank of America economist Michael Gapen said in a note. “There also seems to be strong consensus that policy is in restrictive territory, and so hikes are probably not necessary either.”
According to the minutes of the most recent FOMC meeting, which ended on May 1, some participants even questioned if "high interest rates may be having smaller effects than in the past."
BofA believes the Fed could hold off on making cuts until December, but Gapen pointed out that there are a lot of unknowns that might affect how the labour market's possible weakening and inflation's slowing interact.
Next Friday, when the Commerce Department releases its monthly report on personal income and spending, which also includes the personal consumption expenditures price index—the inflation indicator that the Fed is most interested in—economists like Gapen and others on Wall Street will be closely watching.
Although there is a loose agreement on a monthly rise of 0.2% to 0.3%, the Fed may not feel confident enough to make any cuts despite even that little improvement. At that rate, yearly inflation would probably remain substantially over the Fed's target of 2%, hovering around 3%.
“If our forecast is correct, the [year-over-year inflation] rate will drop by only a few basis points to 2.75%,” Gapen said. “There is very little sign of progress towards the Fed’s target.”
According to the CME Group's FedWatch Tool, prices on Friday afternoon increased to a roughly 60% possibility that there would now be only one cut, although traders had been expecting at least six at the beginning of the year. Although the company still anticipates two cuts this year, Goldman Sachs pushed down its first projected decrease to September.
Since last July, the benchmark fed funds rate set by the central bank has fluctuated between 5.25% and 5.50%.
The urgency is lessened, according to Goldman economist David Mericle, who said in a note, "We continue to see rate cuts as optional."
“While the Fed leadership appears to share our relaxed view on the inflation outlook and will likely be ready to cut before too long, a number of FOMC participants still appear to be more concerned about inflation and more reluctant to cut.”
(Source:www.forexfactory.com)