Wall Street Pushing Back Rate Cut Hopes

Josh Schafer |

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Investors were bullish late last year on when, and how quickly, the Federal Reserve would cut interest rates in 2024. New inflation data along with cautious comments from Fed officials have prompted markets to pull back expectations. Markets are now pricing in three interest rate cuts for 2024, in line with the Fed's most recent forecast and down from a former consensus of six cuts seen back in December.  Among those pushing back projections for cuts is Goldman Sachs. The firm said it now sees four cuts this year instead of its previous projection of five. It expects the first interest rate cut to come in June. Goldman's new forecast referenced comments from Fed Governor Christopher Waller who said this week that "another couple" of months of inflation data are needed to decide whether January's hotter-than-expected Consumer Price Index (CPI) report was a "speed bump or a pothole." Waller's comments came one day after minutes from the Federal Reserve's January meeting showed most officials were concerned about the risks of "moving too quickly" when lowering interest rates. The central bank appears confident the economy is on solid footing with few signs of labor market weakness or a downturn in economic growth. This, economists said, could give the Fed confidence it can keep interest rates high without sending the economy into recession. There is also a growing consensus that despite Fed Chair Jay Powell highlighting six-month progress on inflation at the central bank's most recent meeting, the Fed will simply want to see more data before lowering rates, as it has said. This is why many now expect cuts to come later once more economic data is available. Since the Fed was late in tightening policy as inflation surged to its highest level in four decades, it will likely be more cautious about cutting too soon. That is something that markets have not perceived. They've now come to that view. "Markets were anticipating too early and too rapid of a rate cutting cycle, and that just was unlikely to materialize unless the economic landscape shifted materially, unless we saw a notable slowdown in economic activity and an even faster slowdown in inflation." January data showed stronger-than-expected labor market activity, but consumer spending, industrial production, and housing activity were weaker than projected. Typically, a strong labor market would support growth in those other parts of the economy. Even with markets more bearish on cuts there has been a silver lining. The financial market's resilience despite a "tremendous" repricing in rate cut expectations was a welcome sign. Both the Dow Jones and S&P 500 posted new highs this week — while volatility has remained low despite a rise in Treasury yields.