Fed Flips on Interest Rate Hike: Bulls Brace for Uncertain Summer


Fed’s Summer Turnaround: Interest Rate Cuts Look Less Likely

Folks hoping for some financial relief from the Federal Reserve this summer might want to brace themselves for a hot streak of disappointment. A string of unexpected economic perks, plus some fresh chatter from central bank honchos, is pointing the needle away from any interest rate chill-out anytime soon.

Traders, who were initially betting on a September rate reduction, have now slammed the brakes on that notion. Instead, they’re cautiously eyeing just one possible cut by year’s end.

Traders working at the New York Stock Exchange

No Need to Trim the Trim

This economic turnaround has been a wet blanket for investors. Thursday marked the worst day for stocks in 2024, with the Dow Jones Industrial Average snapping a five-week winning streak before the Memorial Day holiday.

Experts say the market is listening closely to every economic whisper and translating it through the Fed’s ears. So if the Fed’s decisions are data-driven, the market’s probably in the same boat.

Recently released data paints a clear picture: economic expansion is chugging along, if not gaining speed, while that pesky inflation thing is still hanging around, making consumers and policymakers alike cranky about the cost of living.

For instance, weekly jobless claims, which hit a speed bump a few weeks back, are now settling back down, suggesting businesses aren’t showing employees the door at an alarming pace. And let’s not forget the under-the-radar survey that dropped on Thursday, showing stronger-than-expected growth in both the services and manufacturing sectors, not to mention managers complaining about price pressures.

Minutes That Matter

Just a day before this data dump, minutes from the latest Federal Open Market Committee meeting revealed that central bankers aren’t exactly itching to cut rates. In fact, some even hinted at the possibility of a rate hike if inflation continues to be a stubborn headache.

To top it off, Fed Governor Christopher Waller stated earlier this week that he needs to see months of inflation-taming data before considering a rate reduction.

Adding it all up, it’s pretty clear that the Fed is not in the easing business right now.

Data Dump Watchlist

Economists like Bank of America’s Michael Gapen are keeping a keen eye on next Friday’s release of the personal income and spending data from the Commerce Department, which will also include the Fed’s favorite inflation gauge: the personal consumption expenditures price index.

Expectations are set for a modest monthly uptick, but even that might not be enough to convince the Fed to hit the cut button. At that rate, inflation would still be hovering around 3%, well above the Fed’s 2% target.

Traders are starting to get the message, albeit reluctantly. Back when the year kicked off, they were banking on at least six rate cuts. But now, the odds have shifted to a mere 60% chance of a single cut this year, according to CME Group’s FedWatch Tool. Even Goldman Sachs has pushed back its first expected cut to September, though the firm is still predicting two reductions before the year ends.

The Fed’s benchmark interest rate has been camped out at a cozy 5.25% to 5.50% since last July. And it seems they’re in no hurry to change that.

Goldman economist David Mericle summed it up nicely: “While the Fed leadership shares our relaxed view on inflation and might be ready to cut before long, some FOMC members are still worried about prices and less enthusiastic about easing.”