Key Insights:
- The Federal Reserve signals a prolonged battle against inflation, with President Powell expressing a lack of progress towards their 2% target.
- Wall Street grapples with the probability of rate reductions this year, with some experts predicting a delay until September or even 2025.
- Market expectations for cuts have been highly volatile, with a 71% chance of a September cut and a 44% chance in July.
The Inflationary Puzzle
The Fed faces an uphill task in controlling inflation, which has remained stubbornly around 3% despite several months of efforts. Powell’s comments have dampened market hopes for an imminent turnaround.
“They’re keeping a close eye on inflation,” said Mark Zandi, chief economist at Moody’s Analytics. “They need several consistent months of data aligning with their 2% target. If that’s the barometer, they can’t get there before September.”
Cut Prospects Fading
Wall Street remains on edge as market pricing for rate cuts fluctuates. The probability of no cuts this year has risen to 11%, while some economists forecast a possible delay until March 2025.
Bank of America economists warn of a “real risk” of no cuts this year, even as they maintain their forecast of a December cut. “With inflation exceeding expectations, it’s understandable that the Fed would push back on any urgency to cut,” said Stephen Juneau.
Hoffnungsschimmer
Amid the uncertainty, some analysts remain optimistic about the Fed’s ability to ease policy. Citigroup anticipates rate cuts in June or July, believing that inflation data will improve. Andrew Hollenhorst predicts the Fed “will be pleasantly surprised” by future inflation numbers.
Goldman Sachs has also pushed back its expected easing month to July, but remains confident in the disinflationary trend. “The pause on rate cuts would be lifted if inflation improves,” wrote Krishna Guha, head of the global policy team at Evercore ISI.
Policy Peril
The Fed’s aggressive stance raises concerns about a policy mistake. Prolonged high rates could threaten labor market stability and vulnerable sectors like regional banks exposed to duration risk.
Zandi warns that the Fed should have already begun cutting. “A policy mistake is the most significant risk to the economy,” he said. “They’ve achieved their employment mandate and are close on inflation. We need to be cautious about the financial system.”
Data sourced from: cnbc.com
