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Washington DC
CNN
—
Wall Street is clearly nervous about the Federal Reserve starting to cut interest rates. Some think it could happen as early as March.
But Fed officials are less optimistic, saying they will cut interest rates only three times this year, about half of the cuts the market is currently pricing in.
So why does this disconnect occur?
The bear case for a rate cut is: Central bank officials said there was still a high degree of uncertainty about whether inflation would remain on course toward the 2% target, and that any interest rate cuts would likely come later than some investors had expected, making them more conservative. Showing attitude. That’s why, even as markets roll their eyes every time officials make such hawkish statements, the possibility of further rate hikes remains on the table.
“The airport is just around the corner. But landing the plane won’t be easy, and headwinds and tailwinds can affect the path, especially if visibility is foggy,” Richmond Fed President Thomas Barkin said Wednesday. , at an event in Raleigh, North Carolina. “The U.S. economy continues to defy expectations.”
“Therefore, the possibility of further rate hikes remains on the table,” he said.
This is generally the stance of most Fed officials. So it’s too early to seriously consider cutting interest rates, mainly because the upside risks to inflation are still high and there’s still a lot of uncertainty. .
Minutes of the Fed’s December policy meeting released on Wednesday not only provide evidence of how unprepared Fed officials are to cut rates, but also provide evidence that some investors believe a rate cut will happen sooner rather than later. We also provide evidence as to why we are so optimistic about the future.
Here’s an example of a Wall Street optimist: Officials said in December that they believed the risk of inflation stalling or reigniting had “reduced,” and “pointed to downside risks to the economy associated with an overly restrictive stance,” according to the latest Fed minutes. .
“I think this is a very important change in the way the Fed is communicating its intentions throughout this year, and one of the factors that will increase market expectations for rate cuts,” said Lauren Goodwin, economist and chief market strategist. Stated. New York Life Investment Co., he said in an interview with CNN.
“This is a dramatic change from what they were saying early last year,” she said.
Fed officials’ latest forecasts show this is the year they will finally start cutting rates, and the inflation numbers are encouraging.
The Federal Reserve’s favorite inflation measure, the Personal Consumption Expenditure Price Index, rose 2.6% in the 12 months through November, down from a 40-year peak of 7.1% in June 2022. The core index, which excludes volatile food and energy prices, rose 3.2% over the same period.
Additionally, the Core PCE Price Index rose 1.9% in November on a six-month annualized basis, marking the first time in more than three years that the index has fallen below 2%. Some economists say the numbers are evidence that the U.S. economy may already be stuck in a soft landing, a rare scenario in which inflation slows without a sharp rise in unemployment.
In summary, optimistic investors appear to believe there is sufficient evidence that the central bank will cut interest rates more than officials themselves expected.
Brad Conger, deputy chief investment officer at Hartle, Callahan & Co., told CNN: “The Fed may not be able to cut rates six times, but it could be four by the end of the year.” There is enough.” “The market is more right than the Fed.”
However, as reflected in the minutes of the December meeting, upside risks to inflation remain, including a reacceleration of the economy or unexpected economic shocks.
Some believe that the market is finally coming to grips with reality.
December’s jobs report showed continued strong employment and low unemployment, a positive development for U.S. workers, with the possibility of a soft landing in just a few months. Expectations that interest rates could be cut may have weakened.
“Markets got overly excited about the dot plot in December, but that excitement has now been subdued and prices are starting to reprice,” Seema Shah, chief global strategist at Principal Asset Management, said in a note on Friday. ”, referring to steady employment growth in countries around the world. December.
Friday’s jobs report marked a fitting end to a disappointing year.
The U.S. economy added 216,000 jobs in December and the unemployment rate held steady at 3.7%, the U.S. Bureau of Labor Statistics said Friday. My colleague Alicia Wallace reports that the monthly total exceeded expectations with a net gain of 160,000 jobs, capping off a year of resilience in the labor market.
This time last year, many experts said the Federal Reserve’s anti-inflation rate hike campaign was sure to increase job losses and push the economy into recession.
Rather, continued strength in the labor market drove consumer spending and economic growth over the past 12 months. The job market has certainly cooled, but despite 11 interest rate hikes by the Federal Reserve, which raised the benchmark interest rate by 5 percentage points in less than two years, it hasn’t crashed.
“We have come through an unprecedented event of such large interest rate increases and sharp declines in inflation without a significant increase in the unemployment rate,” Julia Pollack, ZipRecruiter’s chief economist, said in an interview with CNN. ” he said. “I’ve never had anything like that before.”
The Fed appears to be trying to pull off a so-called “soft landing” that would curb inflation without sending the economy into recession.
But the plane hasn’t landed yet.
He also said Friday’s jobs report shows the labor market and the broader economy remain at an inflection point, and the ultimate destination will depend on whether interest rates come down from their 22-year high. He said it was highly likely.
“The labor market has slowed down quite significantly,” Pollack said, noting that employment numbers for October and November have been revised downward by a combined 71,000 jobs. “The underlying rate of employment growth is around 140,000-150,000 (monthly payrolls) and will continue to slow gradually over the coming months until the Fed takes its foot off the brake pedal.”
Monday: Atlanta Fed President Rafael Bostic speaks.
Tuesday: Revenues from Aritzia and Albertsons. The US Department of Commerce reports imports and exports for November. The National Federation of Independent Business releases its December Small Business Optimism Index.
Wednesday: Statement from New York Fed President John Williams.
Thursday: The U.S. Department of Labor will release the Consumer Price Index for December and the number of new unemployment claims for the week ending January 6th. China’s National Bureau of Statistics releases inflation statistics for December, and customs authorities report the country’s trade surplus. December.
Friday: Delta Air Lines Revenue. The UK’s Office for National Statistics has released gross domestic product data for November. The U.S. Department of Labor releases the producer price index for December. Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, spoke.
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