The latest inflation data has strengthened the case for looser monetary policy.
Investors welcomed a weak inflation report in May, which could pave the way for Fed easing this year.
Rate cuts in September are “extremely likely,” one economist said.
Wall Street is feeling a lot more optimistic right now. change in interest rates this year.
On Wednesday, investors applauded positive report on the consumer price index for May. Consumer prices fell below economists’ expectations for the second month in a row.
Inflation remained steady last month and rose 3.3% year over year, the Bureau of Labor Statistics reported, a data point that could put the Federal Reserve back on track to ease policy later this year after a series of discouraging inflation reports in the first quarter. .
Three rate cuts by the end of 2024 are again on the table, with investors estimating there is a 72% chance the Fed could cut rates three or more times by December, according to the report. CME FedWatch Tool.
Some Wall Street analysts predict the Fed’s first rate cut could come as early as July, although most see a September rate cut as the most likely scenario.
“Wednesday’s weaker-than-expected CPI will allow the Fed to begin cutting interest rates as soon as September, as we have now seen several encouraging inflation numbers, following the worrying rise in inflation earlier this year ” said Skyler Weinand, Chief Investment Officer. of Regan Capital, said in a note. “There is a clear path to a soft landing and the Fed could very well come to the market’s rescue in just three months.”
“Today’s news appears to open the door to a rate cut in July, although we still think that is highly unlikely given the Fed’s hawkish rhetoric recently,” said Preston Caldwell, chief U.S. economist. of Morningstar, in a press release. “But rate cuts from September should now be considered extremely likely.”
Overall inflation has slowed, thanks in part to slowing gas and food prices. BLS data shows the gas index fell 3.6% in May. Meanwhile, the home meals index remained stable after falling 0.2% in April.
“The Fed is increasingly risking a slowdown in the economy by leaving rates too high for too long,” Ryan Severino, BGO’s chief economist, said Wednesday. “While our modeling suggests the Fed could cut rates later this year, it does not have infinite time, especially as we see more signs that the U.S. economy is slowing.”
Investors are waiting for Fed Chair Jerome Powell to speak later Wednesday afternoon, which should give markets more guidance on the trajectory of the rate cuts. But the top central banker will likely wait for rate cut signals for now, Weinand said, due to higher-than-expected inflation figures throughout the first quarter.
“Things are going as the Fed hoped, so Jerome Powell will likely feel good this afternoon,” David Russell, TradeStation’s global head of market strategy, said in a note. “Bears have nowhere to run and nowhere to hide.”
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