The Fed is Over, Only Scared to Say: Wall Street

Morgan Stanley chief economist Ellen Zentner said a July rate hike is unlikely, saying: “In the very short term, the hurdles to a rate hike in July are not insurmountable. I think it will be an Olympic feat,” he said.

Zentner said he still expects inflation to tend to slow at a much faster pace than policymakers expected. “By the September meeting, this year’s core inflation forecast and the level of fund rates could be revised downward,” he said.

“Consistent with the economic outlook, we continue to expect the Fed to keep the top rate at 5.1% for an extended period of time before cutting its first 25 basis points rate cut in March 2024,” he added.

“I’m skeptical that the Fed will raise interest rates again, given that inflation is slowing significantly,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “Our base forecast is for the Fed to keep rates on hold for the rest of the year before easing gradually in early 2024.”

“The Fed is channeling its inner Kenny Rogers. It needs to know when to hold and when to fold,” Sweet said.

“Usually when you pause, you don’t go back and hike again,” said Daniel DiMartino Booth, chief strategist at QI Research and former Fed insider. I’m trying to buy time to keep doing it.”

TD Securities has also peaked. “Despite visible efforts by the Fed to signal the possibility of further rate hikes, we think it is likely that the Fed will end its tightening cycle in May. We can’t give up until now, but we don’t expect the Fed to raise rates for the rest of the period.”

“If the Fed really thought it needed to send a strong hawkish signal to the market, the best way to get that message across would be to actually raise rates today,” TD said.

Admittedly, not everyone is convinced the Fed is over.

Santander’s Stephen Stanley said he expects the Fed to raise by a quarter of a percentage point in July, skipping September and raising it in November. “I am pleasantly surprised by the nervousness of the FOMC today. I wasn’t entirely sure I had it.”

“The FOMC’s string of news releases has consistently been more hawkish than expected, indicating that the committee intends to remain aggressive until underlying inflation declines more definitively,” Stanley said. It’s a strong sign,” he said.

First Trust’s Brian Wesbury said that if the Fed had been paying close attention to the money supply, it would have known that monetary policy was tightening right now — Wesbury has been making this point for a while. have promoted.

“The Fed is all messed up. We think a quarter of a percentage point rate hike is likely in July, but whether we get more than that is up to the Fed to ignore. It all depends on how quickly the cuts in the money supply will affect the economy in the second half of the year.”

Wells Fargo economist Jay Bryson said he expected a quarter-point rise at the next meeting, scheduled for late July, “due to continued economic resilience and rising inflation.”

Bryson added, “We believe a modest recession will be needed early next year to encourage the FOMC to ease policy, which will lead to lower inflation.”

Bank of America’s economics team also expects July to rise by a quarter of a percentage point.

“Furthermore, our revised forecasts show that by the end of the summer, employment growth will still be well above the long-term labor force growth ‘break-even’ pace, and inflation will still be well above target. So while we expect another 25 basis points hike in September with a final rate of 5.5-5.75%, the Fed thinks the final rate hike should be in November. Maybe.”

BofA economists said they “currently believe the first rate cut will be in May” from their previous forecast in March.

At a press conference after his statement, Mr. Powell was asked if he would rather raise rates now than wait for them to do so. He said slowing the pace of interest rate movements has benefits, including giving the economy time to adapt. “We are trying to get this right.”

“Maximum Flexibility”

Focusing on this point, economists at ING said it made little sense to pause now and raise next month given the long time lag for the full impact of interest rate movements.

“The way to justify this outcome is that the Fed is acting dovish (unanimously suspended) but speaking hawkish (agreeing to two rate hikes) to maximize the amount of data coming in. It’s giving them a lot of flexibility, which keeps financial conditions tight, but can be dovish and jaw-dropping if the data turns out to be what we expect.”

Chris Zaccarelli, chief investment officer at the Independent Advisors Alliance, said: “The Fed says it will continue to fight inflation by raising interest rates at its upcoming meeting, but the market is not expecting the Fed to stop rates. I hear it’s getting closer,” he said. With interest rates starting to rise, it’s time to put cash to work. “

Paul Ashworth, chief North American economist at Capital Economics, said he expects the Fed to pass a quarter-point rate hike in July and then pause. “We believe weak economic activity and employment, coupled with encouraging signs that core inflation is slowing, will ultimately convince the Fed that a final rate hike in September is not necessary.

“For now, the futures market seems to agree. Where we differ from the Fed and the market is that we expect the Fed Funds rate to cut even more significantly next year.”

CME Group’s FedWatch tool expects the market to rise by a quarter of a percentage point in July before sustaining at its September meeting and continuing through the end of 2023.

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