The Federal Reserve probably won’t cut interest rates this summer

Investors will have to hang in there through the summer, when it looks increasingly unlikely that the Federal Reserve will cut interest rates.

A wave of better-than-expected economic data and new comments from policymakers have not signaled any near-term policy easing, with traders again moving futures prices this week, ruling out a September rate cut and now predicting just one cut by the end of the year.

The overall reaction was lackluster, with the stock market on Thursday posting its worst day of 2024, and the Dow Jones Industrial Average ending a five-week streak of gains ahead of the Memorial Day holiday.

“The economy may not be as cold as the Fed would like,” said Quincy Krosby, chief global strategist at LPL Financial Inc. “The market takes in all the data and interprets it in the Fed’s view. So if the Fed is data-dependent, the market is probably going to be more data-dependent.”

The data from the past week or so has sent a very clear message: economic growth is at least stabilizing, if not trending upward, but inflation is ever-present as consumers and policymakers alike remain wary of the rising cost of living.

One example is weekly jobless claims, which hit its highest level since late August 2023 a few weeks ago but have since trended back to indicate businesses are not speeding up the pace of layoffs.Also, unspectacular survey results were released Thursday showing better-than-expected expansions in both the services and manufacturing sectors, and purchasing managers reported that inflation is strengthening.

Both data came a day after the release of minutes from the last Federal Open Market Committee meeting suggesting the central bank remains unsure about cutting rates and that an unspecified number of central bankers said they may be open to raising rates if inflation worsens.

Additionally, Fed Governor Christopher Waller said earlier this week that he needs to see several months of data showing that inflation is easing before agreeing to cut rates.

All of this combined gives the Fed little reason to ease policy here.

“Recent Fed comments and the May FOMC minutes clearly suggest that this year’s upside inflation surprise combined with robust economic activity makes a rate cut less likely in the near term,” Bank of America economist Michael Gapen said in a note. “There also appears to be strong consensus that policy is in tightening territory, with rate hikes probably not necessary.”

At the most recent FOMC meeting, which ended on May 1, some members even questioned whether “the impact of higher interest rates may be less than in the past,” according to minutes.

Bank of America believes the Fed may wait until December before starting to cut rates, but Gapen noted that several uncertainties regarding the combination of a softening labor market and easing inflation could come into play.

Gapen and other Wall Street economists will be closely watching next Friday when the Commerce Department releases its monthly personal income and expenditures report, which includes the personal consumption expenditures price index, the Fed’s most closely watched inflation measure.

The unofficial consensus is for a 0.2% to 0.3% monthly increase, but even that relatively modest increase may not give the Fed the confidence to cut rates anytime soon. At this pace, annual inflation would likely remain just below 3%, or still well above the Fed’s 2% target.

“If our predictions are correct, [year-over-year inflation] “Interest rates will fall just a few basis points to 2.75 percent, and there are few signs of progress toward the Fed’s goal,” Gapen said.

The market reluctantly agrees.

Traders had expected at least six rate cuts at the start of the year, but by Friday afternoon the chances of just one had risen to about 60% according to CME Group’s FedWatch tool. Goldman Sachs lowered its forecast for the first rate cut in September, but the firm still sees two cuts this year.

The federal funds rate, the central bank’s policy interest rate, has fluctuated between 5.25% and 5.50% since July last year.

“We continue to view a rate cut as an option and the urgency has faded,” Goldman economist David Mericle said in a note. “While Fed leadership appears to share our optimism about the inflation outlook and will likely cut rates soon, many FOMC participants remain concerned about inflation and appear reluctant to cut rates.”