Tonight, the focus is on the Federal Reserve

Wall Street Sights

2024-05-01 17:32Posted on the official account of Shanghai Wall Street

Tonight, it seems that the Fed will not cut interest rates.

At 14:00 EST on Thursday, May 1 (2:00 a.m. Beijing time on Thursday, May 2), the Federal Reserve will announce its interest rate decision. Fed Chair Jerome Powell will hold a monetary policy press conference half an hour after the interest rate decision.

The Fed is widely expected to maintain its current restrictive policy stance until it is more confident in controlling inflation, and the FOMC meeting will continue to keep interest rates at their highest levels in more than two decades, i.e., keeping the federal funds target range at 5.25-5.50%.

Expectations of rate cuts in 2024 have been repeatedly postponed so far this year due to stubborn inflation, and traders now expect the Fed to cut rates only once this year, well below the number of times they expected about six at the beginning of the year.

In his last remarks, Powell said that policymakers are likely to keep interest rates elevated for longer than previously expected, explaining that there is currently a lack of further progress in bringing inflation down and that the labor market remains strong.

or for the third time in a row "standing still"

As of press time, CME Group's FedWatch tool shows that the futures market believes that the probability that the Fed will keep interest rates unchanged in May is as high as nearly 97%.

Since the beginning of this year, the Fed has announced two consecutive FOMC meetings in January and March to keep interest rates unchanged.

In addition, according to Wall Street news, 10 major Wall Street banks, including Goldman Sachs, Citigroup, Morgan Stanley, and JPMorgan Chase Nomura, all predict that the Federal Reserve will keep interest rates unchanged in May.

The UBS analytical team also pointed out in the research report that there will be no change in the Fed's monetary policy stance this time, and the main focus will be on Fed Chairman Powell's remarks at the post-meeting press conference.

Will there be any more rate cuts this year?

What's next?

According to the CME FedWatch tool, investors have pushed off their rate cut expectations until November, expecting an 88.5% chance of a continuation of the unchanged decision in June, compared to a 55.2% probability on the eve of the last March FOMC meeting.

Bank of America Merrill Lynch analyst Michael Gapen team pointed out in the report that given that the recent inflation data did not give the Fed the confidence that it can start an easing cycle, it is impossible to cut interest rates in June, and postponed the expectation of the first rate cut to December, raising the terminal rate expectation to 3.50-3.75% in 2026.

Bank of America Merrill Lynch believes that the Fed will not abandon its base case of declining inflation, despite the cooling of confidence in the speed of inflation cooling.

HSBC is more optimistic, with its analyst Ryan Wang saying in a note that the Fed is expected to cut interest rates by 25 basis points per quarter starting in June until the third quarter of 2025.

Wang pointed out that the PCE price index is a key factor in rate cuts, and the Fed needs to see core PCE prices fall to around the 2.5% level before starting to cut rates. The latest data showed that the year-on-year growth rate of core PCE prices edged up to 2.82% in March.

Citi believes that the Fed may start cutting interest rates this summer, and the probability of a rate cut in July has increased compared to June, and points out that the expectation of a complete rate cut this year is too aggressive.

On the other hand, the more pessimistic view is that the Fed will not only not cut rates this year, but may raise them again.

LaVorgna, former chief economist of the National Economic Council, said:

"As it stands, that means the Fed won't cut rates, and if [inflation] doesn't come down, the Fed will either have to raise rates at some point or keep them higher for longer. Will this finally give us a hard landing?"

Bank of America Merrill Lynch pointed out that there are two catalysts for the Fed to move to interest rate hikes next: one is the acceleration of core and headline inflation, and the other is the upward revision of inflation expectations.

Slowing down the introduction of QT?

Analysts are currently divided on when quantitative tightening will end, but a gradual slowdown in QT is widely expected.

At the March FOMC meeting, Powell said that the committee generally believed that it was appropriate to slow the pace of balance sheet reduction "soon", and Wall Street interpreted the speech as a signal from the Fed that it would soon slow QT.

HSBC expects the Fed to announce a slowdown in the pace of QT at this meeting, reducing the size of balance sheet reduction, including US Treasuries and agency mortgage-backed securities (MBS), from about $80 billion per month to about $50 billion per month. Conversely, if the Fed does not announce a slowdown in QT as expected, Powell may also give new wording on the topic and may hint at a decision in June or July.

UBS also believes that the plan to slow down QT will be announced in June and officially implemented in July.

However, Bank of America Merrill Lynch expects that the Fed may continue to maintain the current pace of balance sheet reduction, given that the overnight reverse repo (ON RRP) balance is still sticky, meaning that liquidity in the market has dried up. However, Bank of America Merrill Lynch also pointed out that the Fed may announce a reduction in the maximum monthly cap on the maturity redemption of Treasury bills, from $60 billion to $30 billion, which can also play a role in slowing QT.

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