Will the Fed cut interest rates this year? BlackRock warns it’s unlikely

A weeklong rout in bank shares globally has unleashed historic demand for government debt and other havens. Reuters, the news and media division of Thomson Reuters, is the world’s largest multimedia news provider, reaching billions of people worldwide every day. Reuters provides business, financial, national and international news to professionals via desktop terminals, the world’s media organizations, industry events and directly to consumers.

• As recently as Wednesday, a half-point rate hike this month was viewed as likelier than another quarter-point move and a rate cut later this year was counted out.
• Consumer prices have likely already peaked, with inflation falling to 6 percent in February after soaring as high as 9.1 percent last June.
• But if interest rates fall, the same home for the same purchase price will result in lower monthly payments and less total interest paid over the life of the mortgage.
• Bond and stock-market investors alike have convinced themselves that the Fed will cut rates quickly this year, said Ethan Harris, head of global economic research at Bank of America Securities.
• If the Fed turned around and cut rates like the market is pricing in for 2023, it would create “the worst of all possible worlds,” Brusca added.

More than four-fifths of economists (or 82 percent) say officials likely won’t begin cutting borrowing costs until 2024, even as the recent failure of the nation’s 16th largest bank risks worsening financial stability. Fed rate cuts are designed to lower interest rates throughout the economy and make it cheaper to borrow money. As a result, newly issued debt securities offer lower interest rates to holders while existing debt that carries higher interest rates may trade at a premium—that is, prices in the secondary market may rise. Entities that issue callable bonds may choose to refinance the securities and lock in lower rates.

Why Do We Disagree With Other Investors (and the Fed) on How Quickly Interest Rates Will Fall?

Bond and stock-market investors alike have convinced themselves that the Fed will cut rates quickly this year, said Ethan Harris, head of global economic research at Bank of America Securities. This would solve the Fed’s financial conditions dilemma, in that it will not ease until these tighten. The dirty little secret about FCIs (financial conditions indexes) is that they are highly correlated to equities. If stocks are soon a lot lower after a velocity-induced selloff, there will be little to stop the Fed cutting rates, perhaps by a lot, when the economy is showing marked signs of distress.

As the U.S. dollar rises—bolstered by higher interest rates—against foreign currencies, companies abroad see their sales decline in real terms. Market expectations of rate cuts did firm considerably after the collapse of Silicon Valley Bank in mid-March. Traders in derivative markets have partly walked back rate-cut expectations, but still see the fed-funds rate — now at 5% to 5.25% — falling back to above 4.5% by year-end. “The fact that Core inflation’s annualized pace remains well above the Federal Reserve’s target of 2% and shows no signs of trending downward is critical,” PNC senior economist Kurt Rankin wrote in response to the CPI data.

Market Insights Overview

The Fed’s move was made in coordination with efforts to buttress the global economy by the Bank of England and the Bank of Japan. Federal Reserve Chairman Jerome Powell has been a frequent target of President Trump, who has urged the central bank to slash interest rates more aggressively. BlackRock – which manages about $10 trillion in assets – said there are still signs of price pressures within the economy, noting that inflation is “still not on track” to settle at the Fed’s 2% target. The Labor Department reported earlier https://forexhero.info/liteforex-broker-overview/ this month that the consumer price index climbed 0.4% in February from the previous month and 6% on an annual basis – about three times the pre-pandemic average. Even so, inflation is currently coming from so-called “stickier” components, meaning prices that change relatively slowly, according to an analysis from the Atlanta Fed. Recent bank failures could also dampen consumer spending and business investment, as financial institutions offer fewer loans to retain enough money on hand to cover their customers’ needs.

Global financial markets have been shaken deeply by the growing pandemic. And U.S. stock indexes have plummeted at least 20% from their recent record highs — putting the market in bear market territory after an 11-year winning streak. The Dow has fallen nearly 6,400 points since its record high on Feb. 12. In cutting its key interest to zero, the Fed has practically lost a major policy tool — one that it would need if the economy tumbles into recession. But the Fed said its policymaking committee “will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.”

Resolution of Supply Constraints Plus Fed Tightening Will Crush Inflation

However, unofficial factors including political pressure and trade concerns may have also forced the Fed into action. Treasuries has fallen sharply they still play an important role in hedging equity market volatility. Should the U.S. 10-year yield fall from 2% back to its record low level of 1.36%, it would generate a total return of approximately 8.0% over the course of a year. The U.S. economy has entered a record 11th year of growth and while cycles do not die of old age they do become more vulnerable to external shocks. In a world of slowing global growth, rising geopolitical tensions and trade fears, long-dated bond yields can still provide a valuable hedge against financial market volatility.

New York Fed chief John Williams said Tuesday he’ll be closely monitoring how strains in the banking sector affect the US economy, and left the door open to leaving interest rates on hold next month. Top economist Mohamed El-Erian tweeted on Monday that the Fed could be compelled to halt its rate hikes aimed at cooling inflation. But if interest rates fall, the same home for the same purchase price will result in lower monthly payments and less total interest paid over the life of the mortgage. As mortgage rates fall, the same home becomes more affordable—and so buyers should be more eager to make purchases. A sign of a rate hike can send home borrowers rushing to close on a deal for a fixed loan rate on a new home.

Market Data

It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results. The U.S. 10-year may yield just 2.02%, but that is higher than 88% of other developed market government bonds.

The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). Political pressure, trade tensions and economic weakness globally, are just a few other issues that may also justify the recent change in stance. Given the Fed is reluctant to comment on these politically-charged topics, it may instead be using falling long-term inflation expectations as a convenient scapegoat for cutting rates. Market pricing indicates that central bankers will approve another quarter-percentage point rate hike at their May meeting, according to the CME Group’s FedWatch Group.

But traders expect the Fed to pivot and start reducing the federal funds rate as soon as July, eventually trimming as much as a full percentage point by the end of the year. Even if the economy got very weak quickly, inflation would be too high to enable a cut. Markets have been too eager for the Fed to not hike, to stop hiking, to cut rates and have been repeatedly wrong. Maybe these have been bets on banking sector problems welling up and stopping the Fed, or maybe it was just ‘something in the water.’ I view market prices as peculiar. Still, markets are pricing in multiple cuts for 2023, totaling 0.75 percentage point, that would take the Fed’s benchmark rate down to a target range of 4.25%-4.5%. The central bank raised its fed funds rate last week by a quarter point, to 5.0%-5.25%, its 10th increase since March 2022.