The Fed probably won’t be delivering any interest rate cuts this summer

Investors
likely
will
have
to
sweat
out
a
summer
during
which
it
looks
increasingly
improbable
that
the
Federal
Reserve
will
be
cutting
interest
rates.

A
batch
of
stronger-than-expected
economic
data
coupled
with
fresh
commentary
from
policymakers
is
pointing
away
from
any
near-term
policy
easing.
Traders
this
week
again
shifted
futures
pricing,
moving
away
from
the
likelihood
of
a
reduction
in
rates
in
September
and
now
anticipating
just
one
cut
by
the
end
of
the
year.

The
broader
reaction
was
not
pleasant,
with
stocks
suffering
their

worst
day
of
2024
on
Thursday
and
the
Dow
Jones
Industrial
Average
breaking
what
had
been

a
five-week
winning
streak
ahead
of
the
Memorial
Day
break.

“The
economy
may
not
be
cooling
off
as
much
as
the
Fed
would
like,”
said
Quincy
Krosby,
chief
global
strategist
at
LPL
Financial.
“The
market
takes
every
bit
of
data
and
translates
it
to
how
the
Fed
sees
it.
So
if
the
Fed
is
data
dependent,
the
market
is
probably
more
data
dependent.”

Over
the
past
week
or
so,
the
data
has
sent
a
pretty
clear
message:
Economic
growth
is
at
least
stable
if
not
on
the
rise,
while
inflation
is
ever-present
as
consumers
and
policymakers
alike
remain
wary
of
the
high
cost
of
living.

Examples
include
weekly
jobless
claims,
which
a
few
weeks
ago

hit
their
highest
level
since
late
August
2023
but
have
since
receded
back
to
a
trend
that
has
indicated
companies
have
not
stepped
up
the
pace
of
layoffs.
Then
there
was
a
lower-profile
survey
release
Thursday
that
showed
stronger
than
expected

expansion
in
both
the
services
and
manufacturing
sectors
and
purchase
managers
reporting
stronger
inflation.

Both
data
points
came
one
day
after
the
release
of

minutes
from
the
last
Federal
Open
Market
Committee
meeting
indicating
central
bankers
still
lack
the
confidence
to
cut
and
even
an
unspecified
few
saying
they
could
be
open
to
hiking
if
inflation
gets
worse.

On
top
of
that,
Fed
Governor

Christopher
Waller
earlier
in
the
week
said
he
would
need
to
see
several
months’
worth
of
data
indicating
that
inflation
is
easing
before
agreeing
to
lower
rates.

Put
it
together,
and
there’s
not
much
reason
for
the
Fed
to
be
easing
policy
here.

“Recent
Fedspeak
and
the
May
FOMC
minutes
make
it
clear
that
the
upside
inflation
surprises
this
year,
coupled
with
solid
activity,
are
likely
to
take
rate
cuts
off
the
table
for
now,”
Bank
of
America
economist
Michael
Gapen
said
in
a
note.
“There
also
seems
to
be
strong
consensus
that
policy
is
in
restrictive
territory,
and
so
hikes
are
probably
not
necessary
either.”

Some
members
at
the
most
recent
FOMC
meeting,
which
concluded
May
1,
even
wondered
whether
“high
interest
rates
may
be
having
smaller
effects
than
in
the
past,”
the
minutes
stated.

BofA
thinks
the
Fed
could
wait
until
December
to
start
cutting,
though
Gapen
noted
a
number
of
wildcards
that
could
come
into
play
regarding
the
mix
between
a
potentially
softening
labor
market
and
easing
inflation.

Economists
such
as
Gapen
and
others
on
Wall
Street
will
be
looking
closely
next
Friday
when
the
Commerce
Department
releases
its
monthly
look
at
personal
income
and
spending
that
also
will
include
the
personal
consumption
expenditures
price
index,
the
inflation
gauge
that
draws
the
most
focus
from
the
Fed.

The
informal
consensus
is
for
a
monthly
gain
between
0.2%
and
0.3%,
but
even
that
relatively
muted
gain
might
not
give
the
Fed
much
confidence
to
cut.
At
that
rate,
annual
inflation
likely
would
be
stuck
just
shy
of
3%,
or
still
well
above
the
Fed’s
2%
goal.

“If
our
forecast
is
correct,
the
[year-over-year
inflation]
rate
will
drop
by
only
a
few
basis
points
to
2.75%,”
Gapen
said.
“There
is
very
little
sign
of
progress
towards
the
Fed’s
target.”

Markets
agree,
if
reluctantly.

Where
traders
at
the
beginning
of
the
year
had
been
anticipating
at
least
six
cuts,
pricing
Friday
afternoon
moved
to
a
roughly
60%
likelihood
that
there
now
will
be
only
one,
according
to
the

CME
Group’s
FedWatch
Tool.
Goldman
Sachs
pulled
back
its
first
expected
cut
to
September,
though
the
firm
still
expects
two
this
year.

The
central
bank’s
benchmark
fed
funds
rate
has
stood
at
5.25%
to
5.50%
since
last
July.

“We
continue
to
see
rate
cuts
as
optional,
which
lessens
the
urgency,”
Goldman
economist
David
Mericle
said
in
a
note.
“While
the
Fed
leadership
appears
to
share
our
relaxed
view
on
the
inflation
outlook
and
will
likely
be
ready
to
cut
before
too
long,
a
number
of
FOMC
participants
still
appear
to
be
more
concerned
about
inflation
and
more
reluctant
to
cut.”