The Federal Reserve is facing pressure not to reduce interest rates too soon, as recent data has suggested that a summer rate cut may be off the table. The strength of the U.S. labor market, as indicated by the latest jobs report, has reinforced the need for caution. Minneapolis Fed President Neel Kashkari even suggested that no rate cuts might be possible if inflation remains stable. Economist George Lagarias believes that rate cuts in the summer are now less likely, and it is possible that any cuts may be postponed until later in the year.
Market uncertainty is reflected in the probability of a rate cut being under 50% for both June and July, according to CME’s FedWatch tool. Lagarias explained that the Fed is being cautious due to past errors in forecasting. However, he believes it is still likely that there will be rate cuts this year, but the Fed is waiting for more data to make a decision. Despite speculation that there may be no rate cuts this year, with some economists suggesting that the U.S. economy is not slowing down, others are still expecting rate cuts based on the Federal Reserve’s own signaling.
Former Federal Reserve Vice Chairman Roger Ferguson sees a 10-15% chance of no rate cuts this year, while Vanguard has no rate cuts as its base case for the year. However, others are backing the Federal Reserve’s March signaling that three quarter-percentage-point cuts may be expected this year. Goldman Sachs Chief Economist Jan Hatzius believes that rate cuts are still likely based on current growth and inflation forecasts, as well as statements made by Chair Powell and other Fed officials. The timing of any rate cuts will depend on near-term data and the Fed’s reaction function.
The strong U.S. economy, supported by debt and credit cards, is a factor that complicates the Fed’s decision-making process. Lagarias emphasized that the Fed does not want to be perceived as cutting rates prematurely again, as they did in 2021 with the “team transitory” forecasting error. Lagarias believes that, although rate cuts are likely this year, the Fed is willing to wait for more favorable data before making a decision. The uncertainty in the market regarding the possibility of rate cuts demonstrates the challenging environment that the Federal Reserve currently faces in determining the appropriate monetary policy for the U.S. economy.
