Aurelia Butler

J.P. Morgan and Goldman Sachs expect the Fed to start cutting rates as soon as July, while Morgan Stanley, UBS Wealth Management, Bank of America, and Deutsche Bank see rate cuts coming in September or December.WHY IT’S IMPORTANT Expectations of interest rate cuts this year have boosted demand for equities, after a downbeat 2023 when steep borrowing costs dented the valuation of companies and forced consumers to rein in spending. The April inflation readings renewed confidence in rate cuts, with most brokerages keeping their forecasts unchanged as they await more data. This is in contrast to March, when hot inflation numbers had nudged them to push their outlooks for the year’s first rate cut as far as December, while some even suggested no cuts.CONTEXTThe U.S. consumer prices index (CPI) increased less than expected in April, data showed on Wednesday, potentially encouraging policymakers who were waiting to see renewed progress on inflation before reducing borrowing costs.Market participants are pricing in a roughly 72% chance that the Fed will cut rates in September, according to CME’s FedWatch tool. KEY QUOTES”April Consumer Price index took a step in the right direction after an alarming 1Q… However, one report is unlikely to inspire a significant amount of confidence for the Fed,” BofA Global Research economists said in a note.”While it is still hard to get any good service (level inflation improvement) around here these days, some stabilization is encouraging and can reinforce the Fed’s desire to still make rate cuts this year and keep two cuts still on the table for 2024,” said Rick Rieder, BlackRock (NYSE:BLK)’s chief investment officer of Global Fixed Income. More

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The current “higher for longer” rate mentality would have likely been a big headwind for stocks 12 months ago. However, the bank notes that market participants continue to hang their hats on the themes of declining inflation over time and a Fed that wants to cut interest rates but likely won’t have much of a chance to do so, at least over the balance of this year.”It hasn’t hurt equity markets that the economy and earnings continue to grow at a modest pace,” writes Wells Fargo. “A glance at the fed funds futures contracts shows the market is now pricing in just one to two cuts this year, a far cry from the six to seven cuts as we entered 2024.”For now, Wells Fargo believes the hoped-for rate cuts will likely be slow to come to fruition.”That isn’t to say rate cuts are not coming at all, but it seems unlikely the Fed will move aggressively as the Federal Open Market Committee meets to determine policy in coming quarters,” they add. “The pace of disinflation has stalled for now, but we do see Consumer Price Index inflation edging lower as we move through late summer and into the fall, allowing for two cuts this year.”In 2025, the bank has adjusted down its projected number of rate cuts to just one, which would bring the fed funds target rate into the 4.5% to 4.75% range by the end of next year. More

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NEW YORK (Reuters) – Federal Reserve Bank of New York President John Williams welcomed the arrival of softer consumer inflation data, he told Reuters, but said that positive news is not enough to call for the U.S. central bank to cut interest rates sometime soon. While it is important not to overemphasize the latest economic news, the softer tone of April’s Consumer Price Index is “kind of a positive development after a few months where the data were disappointing,” Williams said in an interview with Reuters on Wednesday. “The overall trend looks reasonably good” for a gradual slowdown in inflation pressures, Williams said. But he is still not sufficiently confident that price pressures are moving sustainably to the Fed’s 2% inflation target before lowering short-term borrowing costs. Monetary policy is “restrictive” and “is in a good place,” Williams said. “I don’t see any indicators now telling me … there’s a reason to change the stance of monetary policy now, and I don’t expect that, I don’t expect to get that greater confidence that we need to see on the inflation progress towards a 2% goal in the very near term.””I don’t see any need to tighten monetary policy today,” Williams said, pouring water on speculation that the Fed might need to raise rates further to reduce inflation to desired levels. The New York Fed leader, one of the top voices at the central bank who also serves as vice-chairman of the rate-setting Federal Open Market Committee, was interviewed in the wake of inflation data indicating a welcome slowdown, renewing Wall Street hopes the Fed might cut interest rates this year. April’s headline CPI rose 3.4% from a year earlier, down from 3.5% in March, while prices excluding food and energy rose 3.6%, the smallest increase in three years.BETTER BALANCE Williams’ remarks offered his first extensive take on monetary policy and the economic outlook since the FOMC met this month and held the policy rate at 5.25%-to-5.50%, where it has been since July. Policy makers also announced they would slow the pace of their effort to shrink the central bank’s large balance sheet. This year, higher-than-expected inflation readings have complicated the Fed’s outlook for monetary policy. In March, officials penciled in three rate cuts over the course of 2024, but sticky inflation has prompted them to back away from firm projections of rate cuts. Some officials have even mused about possible rate increases.Further complicating the outlook, recent growth and hiring data have moderated, raising risks of a low-growth, high-inflation economy that would be thorny for Fed officials to navigate. Meanwhile, Wall Street bets on rate cuts have been volatile, with traders and investors now eyeing a first quarter-point cut in September and a second by the end of the year. In comments Tuesday, Fed Chair Jerome Powell said, “I expect that inflation will move back down … on a monthly basis to levels that were more like the lower readings that we were having last year.” Powell, too, pushed back on rate-increase prospects, saying “it is more likely … we hold the policy rate where it is.”In his remarks, Williams said the economy remains on a solid footing and is coming into better balance. The labor market remains “tight” even as it is moving toward a better place primarily through the elimination of excesses, rather than through pushing up unemployment. Williams said unemployment would likely rise to 4% this year from the current 3.9%. Meanwhile, he said inflation by the Fed’s preferred measure – the personal consumption expenditures price index – will likely be in the low 2% range by year end, putting it at around 2.5% for the year. He expects it to hit around 2% next year and remain there sustainably after that. To change monetary policy, Williams said the Fed needs to have confidence inflation will hold at 2%, not for it to hit 2% before acting to cut rates. “It shouldn’t be that we’re at that 2% level because then I think we will have waited too long,” he said. Williams also said the Fed’s balance sheet, which doubled in size on bond buying stimulus purchases, is still having some “modest” impact on bond yields as the central bank works to reduce the size of its holdings. More