2023-12-18 06:03:21
Is U.S. stock speculation over interest rate cuts too much? Economists do not believe the market’s interest rate expectations (Xinhua News Agency via Getty Images)
The Fed’s turn has made the market more confident that interest rate cuts will begin in early 2024, and the expected rate cuts are much deeper than the Fed’s outlook.
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The interest rate futures market showed that as of Thursday, the market expected an 80% chance of a first interest rate cut in March. This is in line with the latest forecast from Goldman Sachs, which within a week revised its rate cut expectations to March from the fourth quarter of 2024.
Goldman cited comments from the Federal Reserve that inflation would fall faster than originally expected and that recent inflation data were weaker than expected.
“Inflation is returning to target faster, and we now expect the central bank to cut interest rates earlier and faster. We now forecast three consecutive 0.25% rate cuts in March, May and June to prevent the policy rate from becoming too high.” David Mericle, chief U.S. economist at Goldman Sachs, wrote in a report on Thursday. “
The Federal Reserve released its latest “dot plot,” which is where officials expect interest rates to go. The dots show that Fed officials expect to cut interest rates by 0.75% next year, which is 0.25% more than previously forecast.
The central bank expects core inflation to top out at 2.4% next year, down from the 2.6% forecast in September.
However, investors took the news further. According to Bloomberg data, before the Reserve Board’s interest rate meeting in November, the market has already digested expectations of three interest rate cuts next year. Now, investors are expecting seven rate cuts by January 2025, following the Fed kept rates on hold at two meetings and the outlook for inflation is more optimistic.
Still, economists don’t all agree with the market’s aggressive pricing.
Ernst & Young chief economist Greg Daco has been warning that just because a soft landing is in sight does not mean that everything will be smooth sailing for the U.S. economy.
He explained that because consumers are still paying more for everything than before the epidemic, the resulting cost fatigue may still affect the way Americans consume in the future.
“They have become more cautious regarding spending money, whether it is goods or services.” Daco said on Yahoo Finance Live: “As we enter 2024, this will be a key change. The key background and the pillar of a soft landing is the labor market It’s not going to tighten. So far, we haven’t seen the pattern of tightening that preceded the recession… Will this continue?”
Daco pointed out that the Fed’s acknowledgment that it is closer to a rate cut than a rate hike is very important, but this does not fully support the change in market expectations.
“We have to be cautious regarding the market pricing in rate cuts,” Daco said. “Unless there is a recession, the Fed is not going to be in a rush to cut rates quickly…so the euphoria regarding a soft landing and an environment where we’re not going to see any slowdown, Maybe a little too much.
“The Fed won’t be cutting interest rates anytime soon.”
Other economists agree with Daco. Wells Fargo, Morgan Stanley and Deutsche Bank still expect rate cuts to begin in June.
Rich countries see June as the starting point for rate cuts because they believe central banks will need to keep interest rates high while “job growth remains strong and inflation rises.” But in the end, interest rates constrain economic progress, and interest rate cuts will pave the way sooner or later.
“We expect that sluggish economic growth, a weak job market, and continued slowing inflation will prompt the Federal Reserve to start cutting interest rates.” Wells Fargo’s research report wrote.
Key to the rich countries’ argument is the extent of the economic slowdown. If the economy falls into recession, interest rates are expected to be cut by 2.25% in the first quarter of 2025, regarding half a percentage point more than current market expectations. If such a full-blown recession does not occur, rich countries say the pace of interest rate cuts “will be much slower.”
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