Wall Street pushes out rate-cut expectations, sees risk they don’t start until March 2025

If
there
was
any
doubt
before,
Federal
Reserve
Chair

Jerome
Powell
has
pretty
much
cemented
the
likelihood
that
there
won’t
be
interest
rate
reductions
anytime
soon.

Now,
Wall
Street
is
wondering
if
the
central
bank
will
cut
at
all
this
year.

That’s
because

Powell
on
Tuesday
said
there’s
been “a
lack
of
further
progress”
on
lowering
inflation
back
to
the
Fed’s
2%
target,
meaning “it’s
likely
to
take
longer
than
expected”
to
get
enough
confidence
to
start
easing
back
on
policy.

“They’ve
got
the
economy
right
where
they
want
it.
They
now
are
just
focused
on
inflation
numbers.
The
question
is,
what’s
the
bar
here?”
said
Mark
Zandi,
chief
economist
at
Moody’s
Analytics. “My
sense
is
they
need
two,
probably
three
consecutive
months
of
inflation
numbers
that
are
consistent
with
that
2%
target.
If
that’s
the
bar,
the
earliest
they
can
get
there
is
September.
I
just
don’t
see
rate
cuts
before
that.”

With
most
readings
putting
inflation
around
3%
and
not
moving
appreciably
for
several
months,
the
Fed
finds
itself
in
a
tough
slog
on
the
last
mile
toward
its
goal.

Market
pricing
for
rate
cuts

has
been
highly
volatile
in
recent
weeks
as
Wall
Street
has
chased
fluctuating
Fed
rhetoric.
As
of
Wednesday
afternoon,
traders
were
pricing
in
about
a
71%
probability
that
the
central
bank
indeed
most
likely
will
wait
until
September,
with
the
implied
chance
of
a
July
cut
at
44%,
according
to
the

CME
Group’s
FedWatch
gauge.

As
for
a
second
rate
cut,
there
was
a
tilt
toward
one
in
December,
but
that
remains
an
open
question.

“Right
now,
my
base
case
is
two
—
one
in
September
and
one
in
December,
but
I
could
easily
see
one
rate
cut,
in
November,”
said
Zandi,
who
thinks
the
presidential
election
could
factor
into
the
equation
for
Fed
officials
who
insist
they
are
not
swayed
by
politics.

The
uncertainty
has
spread
through
the
Street.
The
market-implied
odds
for
no
cuts
this
year
stood
around
11%
on
Wednesday,
but
the
possibility
can’t
be
ignored
at
this
point.

For
instance,
Bank
of
America
economists
said
there
is
a “real
risk”
that
the
Fed
won’t
cut
until
March
2025 “at
the
earliest,”
though
for
now
they’re
still
going
with
a
December
forecast
for
the
one
and
only
cut
this
year.
Markets
at
the
onset
of
2024
had
been
pricing
in
at
least
six
quarter-percentage
point
reductions.

“We
think
policymakers
will
not
feel
comfortable
starting
the
cutting
cycle
in
June
or
even
September,”
BofA
economist
Stephen
Juneau
said
in
a
client
note. “In
short,
this
is
the
reality
of
a
data-dependent
Fed.
With
the
inflation
data
exceeding
expectations
to
start
the
year,
it
comes
as
little
surprise
that
the
Fed
would
push
back
on
any
urgency
to
cut,
especially
given
the
strong
activity
data.”

To
be
sure,
there’s
still
hope
that
the
inflation
data
turns
lower
in
the
next
few
months
and
gives
the
central
bank
room
to
ease.

Citigroup,
for
example,
still
expects
the
Fed
to
begin
easing
in
June
or
July
and
to
cut
rates
several
times
this
year.
Powell
and
his
fellow
policymakers “will
be
pleasantly
surprised”
by
inflation
data
in
coming
months,
wrote
Citi
economist
Andrew
Hollenhorst,
who
added
that
the
Fed “is
poised
to
cut
rates
on
either
slower
year-on-year
core
inflation
or
any
signs
of
weakness
in
activity
data.”

Elsewhere,
Goldman
Sachs
pushed
back
the
month
that
it
expects
policy
to
ease,
but
only
to
July
from
June,
as “the
broader
disinflationary
narrative
remains
intact,”
wrote
Jan
Hatzius,
the
firm’s
chief
economist.

If
that
is
true,
then “the
pause
on
rate
cuts
would
be
lifted
and
the
Fed
would
move
ahead,”
wrote
Krishna
Guha,
head
of
the
global
policy
and
central
bank
strategy
team
at
Evercore
ISI.
However,
Guha
also
noted
the
wide
breadth
of
policy
possibilities
that
Powell
opened
in
his
remarks
Tuesday.

“We
think
it
still
leaves
the
Fed
uncomfortably
data-point
dependent,
and
highly
vulnerable
to
being
skittled
from
three
to
two
to
one
cut
if
near-term
inflation
data
does
not
cooperate,”
he
added.

The
possibility
of
a
stubborn
Fed
raises
the
possibility
of
a
policy
mistake.
Despite
the
resilient
economy,
higher
rates
for
longer
could
threaten

labor
market
stability,
not
to
mention
areas
of
the
finance
sector
such
as
regional
banks
that
are
susceptible
to
duration
risk
posed
to
fixed
income
portfolios.

Zandi
said
the
Fed
already
should
have
been
cutting
with
inflation
well
off
the
boil
from
its
mid-2022
highs,
adding
that
factors
related
to
housing
are
essentially
the
only
thing
standing
between
the
central
bank
and
its
2%
inflation
goal.

A
Fed
policy
mistake “is
the
most
significant
risk
to
the
economy
at
this
point.
They’ve
already
achieved
their
mandate
on
full
employment.
They’ve
all
but
achieved
their
mandate
on
inflation,”
Zandi
said.

“Stuff
happens,
and
I
think
we
need
to
be
humble
here
regarding
the
financial
system,”
he
added. “They
run
the
risk
they
are
going
to
break
something.
And
to
what
end?
If
I
were
on
the
committee,
I
would
be
strongly
arguing
we
should
go
already.”