A market fueled by aggressive rate cut expectations would be wise to consider the alternative: fewer than expected cuts this year and in 2025.
“As long as the Fed is in that thinking of a moderate slowdown, with inflation gradually moving toward their target, there won’t be a wealth of rate cuts,” Fed Watch Advisors founder Ben Emons said on the podcast Yahoo Finance opening offer (video above or listen here).
Emons believes investors will end up getting “three or four rate cuts” over the next year. There is no need for the Fed to move faster, with a recession looking unlikely.
That sounds about right if current economic trends continue and Fed chief Jerome Powell is to be believed.
First, the June jobs report showed that the US economy added 206,000 nonfarm payroll jobs and the unemployment rate rose slightly to 4.1% from 4%.
RSM Chief Economist Joe Brusuelas told me the report signals the economy is at full employment and the job outlook remains bright.
Meanwhile, US consumer confidence advanced in May for three consecutive months, according to the Conference Board’s latest index. A measure of US consumers’ short-term expectations about income, business and the labor market rose to 74.6 from 68.8 in April.
Confidence levels remained relatively stable in June.
And the latest data from the Federal Reserve shows that the net worth of American households rose by $5 trillion in the first quarter to a record $161 trillion. The gain was driven by higher share prices, while at the same time, household debt as a percentage of GDP fell to its lowest level since 2001.
These metrics support a picture of consumer spending improving at the end of the year, after some volatility in the first half of 2024.
While Powell has acknowledged progress on the inflation-fighting front, he has remained consistent in lowering expectations for a rate cut amid generally strong economic conditions.
“We are aware that if we go too fast, we can undo the good work we have done. If we do it too late, we could unnecessarily damage the recovery and the expansion,” Powell said at a public event held in Portugal last week.
Read more: What the Fed’s Rate Decision Means for Bank Accounts, CDs, Loans and Credit Cards
Market expectations are for the Fed to unlock its first rate cut at the September meeting, followed by another at the December meeting, according to CME Fed Watch data. By the end of 2025, the Fed is seen to have a benchmark rate of 3.75% to 4%. But about 28% of market participants predict rates from 3.25% to 3.75%.
The base rate currently stands at 5.25% to 5.5%.
Still, all the data hasn’t stopped Wall Street from calling for a much more aggressive rate-cutting timeline.
Citi economist Andrew Hollenhorst predicted in a new client note that the Fed could cut interest rates by 200 basis points in the next eight meetings. The first rate cut will take place in September, with the campaign continuing into the summer of 2025 as the economy cools.
If that were to happen, the Fed’s key rate would remain at 3.25% to 3.5%, Citi said.
“A continued softening of activity will provoke cuts at each of the Fed’s next seven meetings, in our base case,” Hollenhorst said.
Emons said of the Citi forecast, “This is really an asset [of rate cuts]and this seems impossible”.
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In the opening quote episode below, Bradesco head of equity strategy Ben Laidler says the market will continue to climb the wall of election worry.
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