Source: WiseMoney, Author: Xu Ran
The US market is preparing for the most important day of the week.
On Wednesday, the Federal Reserve will not only announce the interest rate decision, but also release the dot plot, which will show officials' expectations for the number of rate cuts in 2024. In the previous forecast released in March, it was expected that there would be three rate cuts this year.
Rick Rieder, global chief investment officer of fixed income at BlackRock and head of the global asset allocation team, said in a phone interview that he believes the number of rate cuts may be reduced to two, but the decision is very close because of the differences among Fed officials on this issue, which may point to a forecast of only one rate cut. Rieder said that the market may react 'moderately positively' to the forecast of two rate cuts, but there will still be skepticism about whether the Fed can really achieve this target. Investors may view this forecast as the Fed's 'wish' and question whether there is enough time to achieve two rate cuts this year. He believes that the first rate cut may come in September but he is not very confident of this.
Rieder pointed out that the market may react 'moderately positively' to the forecast of two rate cuts, but there will still be skepticism that the Fed can really achieve this target. Investors may view this forecast as the Fed's 'wish' and question whether there is enough time to achieve two rate cuts this year. He believes that the first rate cut may come in September but he is not very confident about this.
Investors have been watching for signs of a slowdown that could lead to lower inflation or overheating in the US economy and labor market. Although inflation has fallen significantly from its peak in 2022, it is still above the Fed's target of 2%.
Investors will receive the latest US Consumer Price Index (CPI) data on Wednesday morning before the Fed's interest rate decision.
The Fed has kept its benchmark interest rate at a high level to sustainably lower inflation to the target level, and investors expect the Fed to keep interest rates unchanged in June and July.
Yesterday, there were differing views among traders in the fed funds futures market as to whether the Fed will cut interest rates for the first time in September. According to the latest data from the CME FedWatch Tool, the market believes there is a 48.3% chance that the Fed will cut interest rates by one quarter of a percentage point in September, while the chance of keeping the current rate is 47.4%.
David Mericle, chief US economist at Goldman Sachs, said in a Monday email that they expect the dot plot to show two rate cuts in 2024. He also expects the forecast to show a slight increase in long-term or neutral rates, which have risen to 2.6% in March's forecast.
Rieder also expects the Fed's long-term rates to rise slightly in the forecast issued on Wednesday. Looking ahead, Rieder expects long-term rates to 'eventually rise to over 3%', driven by factors such as de-globalisation and spending in areas such as artificial intelligence and infrastructure, which will cause inflation to have some stickiness.
The Fed will release its monetary policy statement at 2 p.m. Eastern time on Wednesday, and Fed Chairman Jerome Powell will hold a press conference at 2:30.
Rieder said he doesn't expect Powell to sound dovish at the press conference because he expects the chairman to say the Fed can wait longer to cut interest rates. When the Fed eventually cuts interest rates, it may suggest that long-term rates will rise in the coming years, which could dampen market expectations of monetary easing.
The US stock market has repeatedly hit record highs this year. The S&P 500 index closed on Tuesday at a historic high, up 12.7% year-to-date.
Liz Ann Sonders, chief investment strategist at Charles Schwab, said that the market's differentiation and dispersion is closely related to the yield environment. Large companies perform better than small ones because of longer debt maturities and more interest income. According to FactSet data, the Russell 2000 index, which reflects US small-cap stocks, fell 0.1% year-to-date as of Tuesday.
Sonders said that because the Fed relies on data, the market is prone to sharp reactions to inflation data or central bank policy guidance, which can cause violent fluctuations in bond yields and affect the stock market. For example, lower-than-expected inflation data may push the stock market higher because investors may think it supports the Fed's expected rate cut this year.
On Tuesday, the yield on the 10-year US Treasury bond fell to 4.403%. After the June 7 release of the employment report exceeded expectations, the yield on the 10-year US Treasury bond rose to 4.428%.
As investors wait for the Fed's interest rate decision, economic forecast summary, and highly anticipated May Consumer Price Index data, the S&P 500 index rose on Tuesday.
Sonders believes that the Fed is currently inclined not to take action and that it will take more obvious signs of weakness in the labor market to get the Fed to cut interest rates. She noted that the unemployment rate rose to 4%, but most of the employment report did not support looser policy.
Yardeni Research said in a report that the CPI report on Wednesday is expected to confirm that inflation continues to fall, approaching the Fed's target of 2%, and that the Fed's achievement of both price stability and maximum employment will not trigger a recession.
Rieder expects that the main message from the Federal Reserve will be 'We can maintain current levels for a longer period of time' and continue to observe economic data. The Fed may acknowledge that the economy has slowed down somewhat, particularly with regard to the pressures faced by low-income consumers, small businesses, and the commercial real estate market. Nevertheless, he believes that the Fed hopes to achieve one to two interest rate cuts this year.
Editor/Lambor