With the Federal Reserve Chairman almost rejecting the possibility of cutting interest rates in the short term this week, Wall Street now seems to be unsure whether to cut interest rates in June or September. They now want to know even more whether the Fed will cut interest rates this year.

Powell said on Tuesday that there is “no further progress” in reducing inflation to the Federal Reserve's 2% goal, which means “it may take longer than expected” to gain enough confidence to begin easing policies.

Mark Zandi, chief economist at Moody's Analytics (Moody's Analytics), said: “They have brought the economy to the state they want it to be. Now they only focus on inflation data. The question is, what's the threshold here? I think they need two in a row, maybe three inflation figures that meet the 2% target. If this is the threshold, they won't be able to reach it until September at the earliest. I couldn't see interest rate cuts until then.”

Since most data shows that the inflation rate is around 3%, and there will be no significant change in a few months, the Federal Reserve finds it still very difficult to reach the last mile of its target. The market also seems to have given up resistance. The CME Federal Reserve's observation tool shows that the current general expectation has changed from 3 to 2, and the first drop has been postponed from June to September.

“Currently, my basic forecast is to cut interest rates twice, once in September and once in December,” Zandi said.

Not cutting interest rates is a “real risk”

The possibility of not cutting interest rates until 2025 seems to be spreading on Wall Street.

For example, Bank of America (Bank of America) analyst Stephen Juneau said that the Federal Reserve will not cut interest rates “at the earliest” until March 2025, which is a “real risk”, although they still predict that the Fed will cut interest rates in December, and this is the only time this year.

“We think policymakers will feel 'uncomfortable' starting the interest rate cut cycle in June or even September,” he said in a client report. “Simply put, this is the reality of the Federal Reserve, which relies on data. As inflation data at the beginning of the year surpassed expectations, it's no surprise that the Fed delayed cutting interest rates, especially given the strong economic activity data.”

What is certain is that inflation data is still expected to fall in the next few months, thus providing room for easing for the Federal Reserve.

Citibank economist Andrew Hollenhorst still expects the Federal Reserve to relax monetary policy in June or July and cut interest rates several times this year. He believes Powell and other policy makers will be “pleasantly surprised” by the inflation data for the next few months. In his view, the Federal Reserve “is prepared to cut interest rates when core inflation slows year over year or when economic activity data shows any signs of weakness.”

Goldman Sachs chief economist Jan Hatzius delayed the first drop forecast from June to July because “broader deflation narratives still exist.”

Risk of policy errors

Krishna Guha, head of Evercore ISI's global policy and central bank strategy team, pointed out that Powell opened up a wide range of policy possibilities in his speech on Tuesday.

“We think this still makes the Fed uncomfortable. It relies on data points, and is very susceptible to recent inflation data. The Fed is very likely to cut interest rates from three times to two, or even once,” he added.

This increases the possibility of policy mistakes. Despite the resilience of the economy, higher interest rates for longer periods of time could threaten the stability of labor markets, not to mention weak financial sectors such as regional banks.

Zandi said that the Fed's policy mistakes are currently the biggest risk facing the economy. They have completed their mission of full employment and have almost completed the task of controlling inflation.

“Things happen all the time, and I think we need to be humble about the financial system. The risk they face is that they'll break something.” He added, “For what exactly? If I were a member of the committee, I would strongly argue that we should act now.”

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