Investors seemed convinced just months ago that the Federal Reserve would begin slashing interest rates aggressively during the first quarter of the year. Now, some are wondering if the central bank might not cut rates at all in 2024.
Sticky consumer and wholesale inflation, shown in fresh data released last week, stoked fears that the Fed will keep rates higher for longer than previously expected. Stocks pulled back from record highs as Wall Street recalibrated its expectations to four or five rate cuts in 2024, more in line with the Fed's projections than the six cuts for the year traders expected in early January.
But the hot inflation data has also brought into question whether the Fed could hold rates at their current 23-year high for the rest of the year or even hike further to bring inflation to its 2% target.
Of course, one month of data doesn't establish a trend, and officials have noted that they like to see several months of data before making key policy decisions. Some investors say that it is premature to expect that the Fed won't pare rates this year, especially considering it penciled in three cuts at its December policy meeting and inflation is still trending lower on an annual basis.
"I don't think they're going to panic just because there's a little bit of a rebound. I think they're going to keep rates steady," said Tom Graff, head of investments at Facet. He expects the central bank to cut rates two to four times this year.
The Federal Reserve in January held rates steady for the fourth straight meeting. Chair Jerome Powell said that while inflation has come down considerably, the central bank wants to see more signs of disinflation before beginning to ease rates.
Officials worried at that policy meeting that inflation could stay sticky. But they also appeared to take the view that their best bet is to hold rates steady for now, according to minutes released Wednesday. Plus, there's no official indication that the central bank won't cut rates this year.
To be sure, that doesn't mean that holding rates pat this year isn't a possibility. Deutsche Bank economists outlined three economic scenarios that could lead to such a situation:
▸ If the core Personal Consumption Expenditures price index, which strips out the more volatile food and energy categories from the Fed's favorite inflation gauge, looks set to end the year at 2.7% or higher. The measure rose 2.9% annually in December, a slowdown from the previous month's 3.2% rate.
▸ If the neutral interest rate, or the rate that maintains full employment and stable inflation, is revised upward closer to 3.5%. The neutral rate should be 2.5%, based on Fed officials' estimates for the central bank's key interest rate, inflation and unemployment.
▸ If economic growth data is strong and unemployment remains at a rate of 4% or lower. The unemployment rate was 3.7% in January.
"There are compelling reasons to begin the process of dialing back the degree of monetary restraint by mid-year," Deutsche Bank economists wrote in a February 14 note. "However, if this progress is not realized, and the economy continues on a robust course … that could lead to no rate cuts this year."
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