- Wall Street is pushing out expectations for when the Federal Reserve will start cutting interest rates, with some experts seeing a risk that rate cuts may not happen until March 2025.
- Economists and strategists now expect the Fed to wait until at least September 2024 before cutting rates, and some are entertaining the possibility of no rate cuts at all this year.
- The lack of further progress in lowering inflation to the Fed’s 2% target is the main reason behind the shifting expectations, as the central bank wants to see more evidence of sustained disinflation before easing policy.
The Federal Reserve has signaled that interest rate cuts are unlikely in the near future as inflation remains stubbornly high. Wall Street now believes the Fed may not cut rates at all in 2024.
When Economists Expect Rate Cuts
Economists and strategists now see the Fed waiting until at least September to cut interest rates. Many increasingly believe there is a possibility of no rate cuts this year. Bank of America economists said there is a real risk the Fed won’t cut until March 2025 at the earliest, though for now they still forecast a cut in December.
Hope for Lower Inflation
There is still hope that inflation data will turn lower in the coming months, which would give the Fed room to ease policy. Markets had priced in at least six quarter-percentage point cuts at the start of 2024. But with inflation exceeding expectations so far this year, the Fed is reluctant to cut rates amid strong economic data.
Risk of Policy Mistake
The possibility of the Fed keeping rates higher for longer raises concerns about a policy mistake. Despite the resilient economy, higher rates for an extended period could threaten labor market stability and hurt areas like regional banks sensitive to duration risk. The Fed likely should have already started cutting with inflation well off its mid-2022 highs. Housing factors are the primary obstacle between the Fed and its 2% inflation target. A Fed policy mistake poses the most significant risk to the economy currently. The Fed risks breaking something in the financial system.
Conclusion
The Fed finds itself in a difficult position regarding when to ease policy as inflation remains elevated. Markets are vulnerable to more disappointment if near-term inflation data does not cooperate. For now, Wall Street believes the chances are low for any rate cuts in 2024.
