Investors are betting on fewer interest rate cuts from the Federal Reserve this year than previously expected, after strong economic data indicated the economy may be growing faster than anticipated.
A robust jobs report on Friday fueled speculation that the Fed may only cut rates once or twice this year, as opposed to the three quarter-point cuts it previously projected. This shift has rattled stock markets, which had been rallying on the hope of lower borrowing costs.
The stronger-than-expected economic data comes after a string of signs that U.S. growth is robust, including a surge in job creation, rising immigration, and a firm housing market. Inflation has also cooled from 40-year highs, but hotter-than-expected readings in recent months have caused the Fed to adopt a wait-and-see approach to rate cuts.
Some Fed officials, including Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan, have said they would hold off on cutting rates unless inflation subsides further. This is a significant change from the beginning of the year, when Wall Street was expecting as many as seven rate cuts in 2024.
Investors have now priced in a higher fed-funds rate by the end of the year, with futures contracts indicating a rate of around 4.75%. This is higher than the Fed’s own forecast of 4.6%. The Fed is still expected to cut rates this year, but some analysts believe this will be pushed back to June from the previously expected March.
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The longer the Fed waits to cut rates, the less likely it is that there will be any cuts this year, as officials are likely to avoid making changes in the midst of the presidential election campaign.
While a strong economy has helped stocks hold near all-time highs, a delay in rate cuts could be worrisome if it leads to a rebound in inflation. There is also a divergence between the Fed and Wall Street on the level where interest rates will ultimately settle. The Fed is forecasting a neutral rate of 3.1% by the end of 2026, while traders are expecting a rate above 3.85%.
Disclaimer:
This article discusses economic data and forecasts from various sources. While the information is believed to be reliable, there is no guarantee of its accuracy or completeness. Economic conditions can change rapidly, and actual results may differ materially from those anticipated.
