Fundstrat’s Tom Lee predicts the Fed will cut rates in June as inflation continues to decline rapidly

Fundstrat’s Tom Lee predicts the Fed will cut rates in June as inflation continues to decline rapidly

Fed Chairman Jerome Powell is expected to begin shrinking the Fed’s balance sheet this year, analysts say.Kevin Dietsch/Getty Images

  • The Fed’s first rate cut is still on track to occur in June, said Fundstrat’s Tom Lee.

  • He says that’s because inflation is falling “like a rock” by most measures.

  • Yet investors only rate a 57% chance of a rate cut by June, according to the CME FedWatch tool.

The Fed is still poised to announce its first rate cut in June as the pace of inflation continues to slow, according to Tom Lee, head of research at Fundstrat.

Lee, who rightly called the stock market’s 20% gain last year, says he expects the Fed to begin cutting rates in less than two months. In a video for Fundstrat clients, he cited the most recent inflation indicators as evidence of slowing prices in the economy, and highlighted three dovish signs.

The first is the PCE Indexwhich is the Fed’s preferred measure of inflation, and rose 2.8% year-over-year in February, the slowest pace of price increases recorded in three years.

Consumer inflation expectations are also “declining”, Lee noted, with median one-year inflation expectations remaining around 3% for the month of February, according to the Latest University of Michigan Survey.

Lee also highlighted France’s core inflation figures – the first inflation figures from the global economy released for March. Inflation fell from 0.9% to 0.2% in France last month – a sign that inflation could be easing in most economies, especially as inflation figures from January and February could be “statistical aberrations,” Lee said.

All of this points to a Fed that may be ready to cut rates sooner than expected, which is good news for stocks. Traders have been waiting for the Fed to cut rates for a year, but markets are pricing in only a 55% chance that the Fed could cut rates by 75 basis points or more this year, according to the report. CME FedWatch Tooldown from the 85% odds assessed a month ago.

Meanwhile, only 57% of investors expect the Fed to announce the first rate cut in June.

This could be because markets are focusing on prices of manufactured goods, the ISM Price Index up to 55.8% in March. This is the only hawkish inflation indicator deployed in the last two trading days, Lee noted.

“I think it’s fake. We’ll actually have more validation on April 10,” Lee said, referring to the release of the March Consumer Price Index report. “Our base case remains that inflation falls like a rock.”

Some economists, however, have warned that inflation is likely to remain high for longer, due to persistent price pressures in the economy. The Fed should wait for a “a few years” before starting to reduce ratestop economist Mohamed El-Erian recently warned, as the underlying inflation rate associated with a strong economy has likely increased in recent years.

Read the original article on Business Insider

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