① Bank of America wrote in a report that if the Federal Reserve does not cut interest rates before June, it may postpone cutting interest rates until March 2025; ② Recent strong economic data has further weakened market bets on interest rate cuts in June; ③ Bank of America predicts that the year-on-year increase in core PCE in the second half of 2024 is unlikely to decline further.
Financial Services Association, April 3 (Editor: Zhou Ziyi) In light of the latest batch of strong economic data, it seems more and more like an unattainable dream for the Federal Reserve to ease monetary policy before June.
According to data released this Monday (April 1), the ISM manufacturing index has expanded for the first time since 2022. The unexpected rise in this data “wiped out” the market's optimism about the Fed's interest rate cut in June, causing the possibility of interest rate cuts in June falling below 50% for a while.
Moreover, recent inflation data also reflects inflationary stickiness. Although in line with expectations, it also leaves no reason for the Federal Reserve to rush to raise interest rates.
Bank of America wrote in a report on Tuesday (April 2) that if the Federal Reserve does not cut interest rates before June, it may delay cutting interest rates until March 2025.
Potential Choices
The reason given by the Bank of America for this view is that the Federal Reserve's official evaluation criteria for policy changes are annual changes in personal consumption expenditure (PCE), which may make it more difficult to justify cutting interest rates later this year.
The US core PCE growth rate slowed to 2.8% year on year in February, in line with expectations, and the lowest level in the past three years.
However, Bank of America believes that compared with last year's data, the year-on-year increase in core PCE in the second half of 2024 is unlikely to decline further.
The bank's analyst wrote in the report, “If the Federal Reserve tells the market in June that there is no reason to cut interest rates (at which time the Federal Reserve will have CPI data for May), which means that the annual rate of core personal consumption expenditure (PCE) may remain flat or rise slightly at that time, then it will be difficult to prove that interest rate cuts later this year are reasonable.”
In this case, Bank of America estimates that March 2025 is a potential choice for the Federal Reserve.
Furthermore, Bank of America analysts have given another assumption, that is, the Federal Reserve is still likely to cut interest rates in June, but it will only cut interest rates once or twice this year.
The report reads, “This is a critical moment. If the two core PCE figures rise by 30 basis points or more in the future, the June interest rate cut may be withdrawn from discussions, especially if economic activity remains stable.”
Although the Bank of America proposed the above two possibilities, as far as the bank's expectations are concerned, it still maintains the previously predicted “three interest rate cuts this year,” and will cut interest rates for the first time in June.
Editor/Somer