Wall Street adjusts Fed rate cut timelines

Rising inflation prompts major banks to revise easing forecasts

Wall Street adjusts Fed rate cut timelines

Economists at major banks are revising their forecasts for Federal Reserve interest rate cuts this year as inflation remains higher than expected.

Bloomberg reported that strategists at Deutsche Bank AG and Bank of America Corp. now predict the Fed will ease policy just once in 2024, in December. This is a sharp reduction from their previous forecasts, which had the central bank beginning to cut rates as early as June.

This shift comes as stronger-than-expected inflation figures bolster the case for the Federal Reserve to maintain its current policy. The recent data, along with positive economic indicators, have fueled a surge in bond yields and skepticism about multiple rate cuts in 2024.

“Recent developments – namely, upside inflation prints, solid labor market data, and easing financial conditions – have clearly diminished the case for commencing rate cuts,” Matthew Luzzetti, chief US economist at Deutsche Bank, said in a note.

Luzzetti and his team had previously argued that easing would hinge on clear signs of inflation falling in key gauges like the core personal consumption expenditures (PCE) price index. Deutsche Bank now expects the PCE price index to hold at 0.3% in March and April.

“If these data are realized, it is unlikely that inflation data alone would justify a cut at the July meeting,” their economists said.

Bank of America forecasts a similar inflation trajectory. 

“This will make a cut as early as June or September unlikely absent of clear signs of labor market deterioration,” Michael Gapen said Thursday. “The acceleration of inflation this year makes a cut before December challenging in our view.”

Read next: Should the mortgage market welcome the 'new normal' on rates?

While both banks now agree on a single 2024 cut, their 2025 outlooks differ. Deutsche Bank predicts two cuts in the first half of 2025, followed by a pause. Bank of America sees a more aggressive easing cycle, with four cuts in 2025 and two in 2026.

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