Source: Golden Ten Data
More and more Federal Reserve officials and economists are discussing the possibility that interest rates will not be cut in 2024. Can the year-to-date carnival of US stocks continue?
From cutting interest rates seven times to three times to possibly zero now, Wall Street's expectations of the Federal Reserve's rate cut in 2024 are rapidly becoming out of date.
Just a few months ago, evidence of a rapid decline in inflation indicated that the Federal Reserve may actively promote interest rate normalization this year. Initial market predictions suggest that the Federal Reserve is expected to cut the federal funds rate to 3.5% from just above 5.25% before the end of the year.
However, a series of strong economic data over the past few months — solid employment reports, a recovery in manufacturing activity, and the Atlanta Federal Reserve's strong forecast of 2.5% GDP growth in the first quarter — suggest that the Federal Reserve will have to wait some time before lowering interest rates.
There are more and more discussions about not cutting interest rates in 2024
The idea that the Federal Reserve will not cut interest rates this year peaked last Thursday. At the time, Minneapolis Federal Reserve Chairman Kashkari said that with such good economic performance, there was no reason to cut interest rates.
Kashkari asked, “If the economy is running very attractively, people have jobs, businesses are running well, and inflation is falling, then why do we need to make any changes?”
Federal Reserve Governor Bowman expressed similar views last Friday. She said that if the inflation rate is still higher than the Fed's long-term target of 2%, then additional interest rate hikes may be needed this year rather than interest rate cuts.
Bowman said, “Although this is not my basic opinion, I still believe that if the anti-inflation process stalls or even reverses, we may need to further raise policy interest rates at future meetings.”
Kashkari's comments triggered a sharp sell-off in the US stock market last Thursday. However, these losses were largely recovered during Friday's trading session after the release of the strong March employment report.
However, market veteran Ed Yardeni (Ed Yardeni) said investors may finally be aware of the fact that interest rate cuts that were seen as a matter of course earlier this year may eventually be cancelled in 2024.
“Investors may finally consider the possibility of not cutting interest rates this year,” Adney said in a report. He added that the recent rise in oil prices meant that inflation faced an upward risk.
Other experts advocating not cutting interest rates this year include top economists Mohamed El-Erian (Mohamed El-Erian) and Torsten Slok (Torsten Slok). The former said last month that the Federal Reserve should wait “a few years” before cutting interest rates to cope with continued inflation. The latter warned that the AI stock frenzy would make it difficult for the Federal Reserve to cut interest rates.
“We're really in an AI bubble, and the side effect is that when tech stocks rise, the financial situation is eased. It makes the job of the Federal Reserve more difficult,” Slock said.
The futures market currently anticipates a 51% chance that the Federal Reserve will cut interest rates for the first time in June. According to Bank of America's opinion, if interest rates are not cut in June, then interest rate cuts are unlikely to occur in the second half of the year as the 2024 presidential election approaches.
The impact of delaying interest rate cuts on the stock market
Theoretically, the Federal Reserve's delay in cutting interest rates would mean a decline in US stocks. However, in the long run, the ultimate factor driving up stock prices is the growth of corporate profits. First-quarter profits were better than expected, supporting the stock market. As a result, although rumors of interest rate cuts have gradually subsided, the stock market is still close to historic highs.
Billionaire investor Ken Fisher (Ken Fisher) said that positive growth prospects in a fully employed economy and efficiency improvements driven by the increasing popularity of artificial intelligence mean that stock prices may continue to rise even if interest rates remain high.
If the stock market and economy can indeed withstand higher interest rates for a longer period of time, then when the next inevitable recession hits, the Federal Reserve will have more room to cut interest rates drastically to stimulate the economy.
Ultimately, as long as a recession is avoided, good economic news will become good news for the stock market.
edit/lambor