Philip Marey, Senior US Strategist at Rabobank, stated that the March inflation in the US was a game changer that destroyed the Fed’s hopes of starting a rate cut in June.
“We now expect the first rate cut in September and the second rate cut in December,” Marey said, adding that the only move that can be expected from the Fed for now may be to reduce the pace of balance sheet reduction.
Marey emphasized that the Fed could halve the pace of balance sheet reduction in May.
‘The discount cycle may stop’
In the presidential elections, Donald Trump could win in November, Marey said, adding that there could be a rise in inflation due to a possible global import tariff and that the Fed could pause the rate cut cycle after two more rate cuts in 2025.
‘We don’t remember any movement before the election’
Chris Rupkey, Chief Economist at FWD Bonds, also noted that monthly changes in core prices in inflation may cool somewhat in the second and third quarters of 2024.
“Under this scenario, we think we will see the first rate cut in September,” Rupkey said, noting that Fed Chairman Jerome Powell may want to be transparent and that it may take more than one report showing that inflation is cooling for a rate cut to become likely. This will be a test of how political the Fed is because we don’t remember the Fed taking action before the presidential election.”
ING Group International Chief Economist James Knightley also stated that high inflation, strong activity in the economy and employment figures postponed market expectations for the Fed’s interest rate cut to December.
“We still see an opportunity for a rate cut in September,” Knightley said, predicting that the Fed could act cautiously and signal that interest rates will remain high if inflation remains high.
‘Interest rate cuts could start in 2025’
Berenberg Senior Economist Dr. Felix Schmidt also noted that the US economy remains surprisingly resilient despite the Fed’s cumulative rate hikes of more than 500 basis points in 2022 and 2023.
This can largely be explained by the fact that a loose fiscal policy, including a large increase in public investment, neutralized monetary constraints, Schmidt said, adding that demand was not supported by extensive subsidies for private investment and government spending after an artificial consumption-led growth caused by an overly generous fiscal policy.
“The ongoing dynamic economic situation, the tight labor market and the stalled process in the fight against inflation will lead the Fed to leave interest rates at the current level until the end of 2024,” Schmidt said.
Schmidt predicted that when the fiscal stimulus ends, probably in 2025, the Fed could move slowly towards loosening monetary policy, noting that four rate cuts of 25 basis points each could occur by the fall of 2025.
