The stock market's best-case interest rate scenario is in tatters after March CPI
- The stock market's best-case scenario for Fed rate cuts is in danger.
- Inflation came in hotter-than-expected for the third month in a row in March.
The best-case scenario for rate cuts this year has been upended, and central bankers could now keep interest rates higher for a lot longer than previously thought, Wall Street strategists are warning.
Prior to the March inflation reading, markets were feeling confident in three cuts, even if they wouldn't happen as soon as previously hoped. Now, according to some forecasters, two cuts would be generous, with some even calling for just one cut by year-end.
Forecasters turned more hawkish on their outlook for the path of interest rates this week after inflation came in hotter than expected. Consumer prices accelerated by 3.5% year-over-year in March, ahead of economists' expectations for the third straight month.
That's a major concern for the Federal Reserve, which has said it needs to see more conclusive evidence that inflation is on a path to reach its 2% target before loosening monetary policy.
Most investors have already taken the possibility of a June Fed rate cut off the table. Markets are pricing in just a 22% chance of a rate cut that month, down from 72% odds priced in a month ago, according to the CME FedWatch tool.
"You can kiss a June rate cut goodbye," Greg McBride, Bankrate's chief financial analyst, said in a note on Wednesday. "There is no improvement here, we're moving in the wrong direction," he added of inflation.
Here's what five top experts and commentators expect for the Fed's next interest rate move:
Larry Summers: No June cut, possible rate hikes
Central bankers are highly unlikely to cut rates in June — and they could even go back to raising interest rates to get inflation back under control, former Treasury Secretary Larry Summers predicted.
"On current facts, a rate cut in June would be a dangerous and egregious error comparable to the errors the @federalreserve was making in the summer of 2021. We do not need rate cuts right now," Summers posted on X this week, though he later told Bloomberg his forecast could change if inflation data were to come in softer.
According to Summers, there is actually rising risk that the Fed's next rate move is up. He notes that the odds of that scenario are slim, but have risen in the wake of March CPI. Earlier this year, he said he saw a 15% chance the Fed hikes again before it cuts rates.
"I don't know whether it's 15% or 25%, but somewhere in that range is what I would say for the next rate being up," he said of the odds of future rate hikes on Wednesday
RBC Capital Markets: 'No cuts till Christmas'
The Fed won't be cutting interest rates until the very end of 2024, RBC strategists said in a note on Wednesday. That compares to the firm's initial forecast, which saw 75 basis-points of rate cuts by the end of the year.
"While not an absolute worst-case scenario, we think today's 0.359% m/m core print—and even more specifically the problematic supercore bounce—may have delivered a critical blow to that narrative with it, the odds of a June cut," the note said, referring to core and supercore inflation data. "It's not even this morning's CPI print itself as much as it is how that print changes the framing around January and February's data."
Goldman Sachs: Only 2 rate cuts this year
The Fed will likely only cut interest rates twice in 2024, Goldman Sachs said, down from its initial forecast of three cuts for the year.
The Fed's first interest rate cut could also come later than markets initially anticipated, strategists warned. The bank is now calling for the first cut to begin in July instead of June, with the second cut to come in November.
Bank of America: 'Low confidence' of a June cut
Bank of America maintained its outlook for three rate cuts in 2024, with the first cut coming in June. But strategists now have less conviction in their call, thanks to the hot March inflation report.
"Altogether, we retain our outlook for a rate cut in June, but with low confidence, and look to tomorrow's PPI data for further evidence of where core PCE inflation may land in March," strategists said, referring to the producer price index report. "That said, we think that the March CPI report points to significant risk of a delay to the start of Fed easing."
If inflation data continues to look unfavorable, the Fed risks postponing their rate cutting cycle to December, or even March 2025, the bank warned.
Barclays: One cut in the second half
Barclays now expects just one rate cut this year in September. That's a downgrade from the firm's initial forecast, which saw the Fed cutting rates every other month starting in June.
"However, we think it is almost equally likely that the cut will be pushed out to December, especially if disinflationary progress proves slower than expected," strategists warned.