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Investors hoping for a number of interest rate cuts this year haven't seen things go according to plan so far.
The new consensus, as strictly as the people in CME Group can measure thisis that the first cut will come at the Fed's September meeting.
Last week provided further evidence of a depressing reality: inflation persists. The Consumer Price Index showed a surprising jump in prices in March, rising 3.5% year-on-year, sending shockwaves through the stock market.
Now that the dust has settled, investors have changed their expectations again. In addition to the questions of “when” and “how many” cuts, the “if” question is now being asked as some analysts say we will not get any interest rate cuts at all.
But there is another wrinkle here.
We may be entering a reality where the Fed has an unofficial deadline for action: July. One reason for this is data-driven. The other is all feelings.
On the data-driven front, simply put, many of the coolest CPI readings last year came in the second half of the year. These data points are currently helping bring down the inflation rate year-on-year – for example, quite flat growth in October. Although the path of inflation is uncertain, three months of hotter-than-expected inflation is not an entirely welcome trend. Currently, analysts at Deutsche Bank expect 0.3% month-on-month growth in the CPI in April and May.
The second issue is more thorny but relevant: As you heard, there are presidential elections next November.
It's not unprecedented for the Fed to make interest rate moves in election years — even at the last meeting before Election Day. In September 2004, for example, the central bank led by Alan Greenspan raised interest rates by 0.25% as part of a rate-hiking campaign after the economy recovered from the dot-com bubble recession. In October 2008 – in an emergency and last scheduled meeting – the Fed under Ben Bernanke cut interest rates, perhaps for obvious reasons.
The Fed's mission has not changed over the past 15 to 20 years. American policy has.
Key figures in both political parties are trying to push the Fed in different directions. One side is Certainly higher from the last.
But Jerome Powell's Fed is not about to make any effort to give even a hint of the appearance of placing its foot on the scale in favor of either candidate.
Our colleagues Ben Werschkull and Jennifer Schonberger have done a great job highlighting the unique challenges Powell faces. He's navigating a reality where the presumptive Republican presidential nominee, the man who originally appointed him to office, views him as the archenemy. Meanwhile, Democrats, who have come to view Powell largely as a steady hand on the wheel, are increasingly Growing impatience.
Wall Street analysts have begun to reset their expectations as well. Economists at Bank of America now expect one cut this year in December. But they put forward an alternative scenario, positing that analysts “may be underestimating the committee’s basic desire to start cutting.” The result will be a cut in June, followed by a long-term suspension.
“Many at the Fed, including Chair Powell, believe policy rates are in restrictive territory. Indeed, most monetary policy rules would also suggest that Fed policy is too tight,” the Bank of England economists wrote. “So, the core of the committee may still see a path to an early cut in order to make the policy a little less restrictive.”
This would meet the July deadline.
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