Is Hawkish Shift On Inflation Imminent? Wall Street Analysts, Traders Brace For Fed Impact

Investors are on edge ahead of Wednesday’s Federal Open Market Committee meeting, as policymakers meet following a slew of higher-than-anticipated inflation readings that have dashed hopes for near-term interest rate cuts.

While there’s widespread agreement among Wall Street analysts that the Fed will maintain interest rates at the meeting, the focus now shifts to the central bank’s stance, specifically concerning the potential scope and timing of an anticipated rate-cutting cycle.

During a recent public appearance, Fed Chair Jerome Powell emphasized the need for more time for policy to take effect. This comes as the latest inflation data failed to instill confidence in the Fed’s ability to reach its 2% target.

Recent inflation reports, including the Personal Consumption Expenditure (PCE) price index — the Fed’s favorite inflation gauge — and data from the Bureau of Labor Statistics, have shown higher-than-expected inflation levels in each of the first three months of 2024.

Read also: ‘This Puts The Fed In Quite A Tricky Position’: 7 Economists Weigh In On March Inflation Report

Analysts expect a more cautious approach from the FOMC in May, given the robust inflation and economic activity data. While no significant changes are expected in the statement’s forward guidance, there is a consensus for the Fed to announce the tapering of its balance sheet runoff, starting from June at a pace of $30 billion per month.

Analysts anticipate a cumulative range of 25 to 100 basis points in rate cuts by the conclusion of 2024. Bank of America is at the forefront of hawkish predictions, suggesting only one cut this year, while Citigroup takes a more dovish position, advocating for a full percentage point reduction.

Investors are pricing in a 35-basis-point cut in interest rates, with one 25-basis-point cut fully priced in by the end of the year, as implied by Fed futures pricing.

Ahead of the Fed meeting, the policy-sensitive two-year Treasury yield traded at 5%, the highest level since mid-November 2023. The S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, rose 0.4% Monday after a 1% surge Friday, but opened Tuesday’s session slightly lower.

Fed’s Rate Cut Path: What Do Wall Street Major Banks Expect?

	2024 Cuts (bp)	2025 Cuts (bp)	1st Cut
Citi	100		Jul
Morgan Stanley	75		Jul
Goldman Sachs	50	100	Jul
TD	50	100	Sep
Wells Fargo	50	100	Sep
Barclays	25	100	Sep/Dec
BNPParibas	25	100	Dec
BofA	25	100	Dec
Deutsche	25	50	Dec

Goldman Sachs Sees ‘Narrower Path To Rate Cuts’

Goldman Sachs economist David Mericle suggests that recent upside surprises in inflation have delayed the first rate cut and narrowed the possibility of rate cuts this year.

“Our baseline expectation is that it will, and that the Fed will therefore continue cutting in order to normalize the funds rate,” Mericle wrote.

Mericle is sticking to a forecast of two rate cuts in July and November, followed by a full percentage point cut in 2025.

Morgan Stanley: Emphasis On Remaining Patient

Morgan Stanley anticipates a focus on patience during the May FOMC meeting as the Fed waits for more convincing evidence of disinflation.

Little change is expected in the statement, though there’s a possibility of a slightly more hawkish tone in the first paragraph, according to the Wall Street firm.

During the press conference, Powell may hint at rate cuts in the future but suggest a longer wait than anticipated, Morgan Stanley said.

The announcement of quantitative tightening tapering is expected in May, with Treasury caps set at $30 billion starting in June. Future actions include a first cut in July, followed by a 25bp cuts in November and December, totaling 75bp in 2024, the firm said.

JPMorgan: Powell Can't Rule Out Rate Hikes

JPMorgan’s attention will be on Powell’s press conference during the May meeting. The FOMC statement is expected to remain largely unchanged, in the firm’s view.

In the press conference, Powell might echo previous remarks regarding inflation data and acknowledge the possibility of further rate hikes, although not as the base case, JPMorgan said.

A quantitative tapering announcement is expected in May, with Treasury caps set at $30 billion starting in May,

Wells Fargo: Little Reason To Ease In Near Term

Wells Fargo said there’s little reason to ease policy in the near term due to stubborn inflation and resilient economic activity.

QT tapering is anticipated in May, with Treasury caps set at $30 billion starting in June.

Future actions include a first cut in September, followed by a 25bp cut in December for a total of 50bps in 2024, with further cuts of 100bp in 2025, according to Wells Fargo.

BofA: Policy Needs More Time To Work

BofA expects the message from the May FOMC meeting to emphasize that restrictive policy needs more time to work. The statement might include mention of recent uneven readings in inflation.

Powell’s press conference is likely to stress the need for more time and indicate a wait-and-see approach until there’s more clarity on inflation, in the firm’s view.

QT tapering is expected in May, with Treasury caps set at $30 billion starting in May, with risks leaning toward a later decision.

The first cut is expected only in December, with further cuts of 100bp in 2025, according to BofA.

Read also: Federal Reserve Meeting Preview: High Interest Rates ‘Need More Time To Work,’ Bank of America Says

Citi: No Further Hawkish Shift

Citigroup does not anticipate a further hawkish shift at the May meeting. During the press conference, Powell might address questions about potential shifts in cut projections compared to March, emphasizing that rates are in restrictive territory, the firm said.

QT tapering is expected in May, with Treasury caps set at $30 billion starting in June. The first rate cut is anticipated in July, with further cuts of 100bps in 2024.

 Now read: Fed Minutes Reveal Growing Unease Over Inflation Path: Not ‘Merely Statistical Aberrations’

Illustration of Federal Reserve Chair Jerome Powell created using artificial intelligence via MidJourney.