Markets excited by expectations of aggressive rate cuts would be wise to consider the alternative: fewer cuts than expected this year and in 2025.
“As long as the Fed is looking at a gradual slowdown and inflation is gradually moving above its target, they’re not going to get the benefit of a rate cut,” Ben Emmons, founder of Fed Watch Advisors, said on Yahoo Finance’s “Opening Bid” podcast, which you can watch above or here.
Emmons believes investors can expect “three or four” rate cuts over the next year, and because a recession seems unlikely, there’s no need for the Fed to act more quickly.
If current economic trends continue and Fed Chairman Jerome Powell is to be believed, that seems about right.
First, the June jobs report showed that the U.S. economy added 206,000 nonfarm payrolls, and the unemployment rate rose slightly from 4% to 4.1%.
RSM chief economist Joe Brusuelas said the report showed the economy was at full employment and the jobs outlook remained positive.
Meanwhile, U.S. consumer confidence rose in May after three consecutive months of declines, according to the Conference Board’s latest index. A measure of U.S. consumers’ short-term expectations about their income, business and job markets rose to 74.6 from 68.8 in April.
Confidence levels remained relatively stable in June.
And U.S. household net worth rose by $5 trillion in the first quarter to a record $161 trillion, according to the latest data from the Federal Reserve, driven by rising stock prices while household debt as a percentage of GDP fell to its lowest level since 2001.
These indicators support the outlook for consumer spending to improve toward the end of 2024, after some volatility in the first half of the year.
While Chairman Powell acknowledged progress in fighting inflation, he has consistently kept expectations of a rate cut in check, citing the generally favorable economic outlook.
“We are very aware that if we act too soon, we could undo the good work that has been done. If we act too late, we could unnecessarily undermine the recovery and the expansion,” Powell said at a public event in Portugal last week.
Read more: How the Federal Reserve’s interest rate decision will affect your bank accounts, CDs, loans and credit cards
According to data from CME Fed Watch, the market expects the Fed to implement its first rate cut at its September meeting and one more at its December meeting. The Fed is expected to set its benchmark rate at 3.75% to 4% by the end of 2025. However, about 28% of market participants see an interest rate range of 3.25% to 3.75%.
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The base interest rate is currently at 5.5%, down from 5.25%.
But even with these data, Wall Street is still expecting a much more aggressive schedule of rate cuts.
Citi economist Andrew Hollenhorst predicted in a new client note that the Fed could cut interest rates by 200 basis points over the next eight meetings, with the first cut coming in September and the rate-cutting campaign continuing through the summer of 2025 as the economy cools.
If this were to happen, Citi said the Fed’s benchmark interest rate would rise to 3.5% to 3.25%.
“Our base case is that continued softening in economic activity would prompt rate cuts over the next seven Fed meetings,” Hollenhorst said.
“That’s a real longshot,” Emmons said of the City’s prediction. [of rate cuts]that’s unlikely.”
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In the Opening Bid episode below, Bradesco’s head of equity strategy Ben Laidler says markets will continue to ride a wall of anxiety heading into the election.
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