JPMorgan analysts have warned that the US Federal Reserve may cut rates as early as September as growth concerns and slowing inflation pave the way for a change in monetary policy. The Fed raised interest rates by another 25 basis points in their latest meeting, pushing the benchmark federal funds rate to a target range of 5-5.25%, the highest level since 2007. However, the Fed has not explicitly indicated a pause in future rate hikes, but linked monetary policy to incoming data.
According to Fed Rate Monitor Tool, the market is currently pricing in a 10% possibility that the Fed raises interest rates again in June. On the other hand, the Fed futures market has priced in more than a 70% chance of rate cuts at the September meeting. Wells Fargo analysts also believe that the Fed will be forced to cut rates before the end of the year, although they don’t believe that will come as early as their JPMorgan colleagues suggest.
The rate futures market expects the Fed funds rate at 4.33% by the end of the year. The benchmark U.S. stock market index fell 0.7% on Wednesday while Dow Jones Industrial Average and Nasdaq Composite lost 0.8% and 0.46%, respectively, following the Fed-linked selloff. Investors are still digesting the FOMC statement as the Fed took out prior language that pointed toward more hikes and said it will remain data-dependent before deciding on its next steps.
Leading Wall Street analysts have said that US monetary policy is clearly in a new era, and while it’s possible further hikes will be needed, the bar for such a move is a lot higher than before. They expect the Fed to remain on hold before making the first 25bp cut in March 2024. However, should regional bank stress stabilize, labor markets stay tight, and inflation stay elevated, a rate hike in June could become appropriate. The US monetary policy is currently at a critical dovish inflection point and the world is closely watching what decision the Fed will make next.
