The recent data and possibly May’s jobs report show signs of weakness in the strong labor market, which can be welcomed for their potential impact on the Fed’s interest rate decisions.
Any Sign of Rate Cuts?
The weaker the economy, the more likely officials will reduce the interest rates. However, this time, the first rate cut will respond to decreasing inflation rather than a weakening economy. Investors are hoping for positive news regarding the interest rates.
David Alcaly, lead macroeconomic strategist at Lazard Asset Management, said that in the future, the economy might see a blend of lower inflation, lower interest rates, and a strong economy. Instead of avoiding a recession, the upcoming rate cuts could be the last signs of a positive economic outlook.
The current market also benefits many investors. The stock market is reaching high records. This is pushing savers and retirees to gain more money from higher interest rates along with increased yields on money markets and government bonds helping them to earn a steady income. However, these recent wage and wealth increases may be impeding Fed rate cuts.
Generally, lower rates are helpful to wage earners more than those who are depending on interest income. High rates have put pressure on many parts of the economy.
It is clear why consumer sentiment is not very high in the current economic market. People looking for mortgages would benefit from lower rates and payments. Delinquencies on credit card and car loans are rising above pre-pandemic levels, particularly affecting younger and lower-income households. Rate cuts would help here too.
Stock market optimists believe the rally will continue. Lower interest rates will make borrowing cheaper and improve business investments, and they view the Fed’s rate cuts as the next step in the market’s rise.
When is the Next Rate Cut?
According to most forecasters in a Reuters poll, the US Federal Reserve is expected to cut its key interest rate in September and once more this year. However, there is a risk they might only cut once or not at all. Economists in Reuters surveys have predicted two cuts, unlike the market, which had been expecting one in November before switching back to two cuts last week.
The shift in futures bets in fed funds occurred because the US economy grew slower than previously estimated last quarter. The officials of the Fed Reserve have time and time again stressed the factor that they are in no rush to reduce rates any time soon. Some economists expect the Fed’s upcoming “dot plot” projection to show two or fewer rate cuts this year. This is down from three in March. However, nearly two-thirds of economists in a recent Reuters poll still predict the first rate cut to 5.00%-5.25% will happen in September, the same as last month’s poll.
Only five economists expect a rate cut in July, down from 11 in May, and none foresee a cut at the June 11-12 policy meeting. Oscar Munoz, chief US macro strategist at TD Securities, predicts cuts in September and December.
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