Market Analysis

Fed to reduce twice or not at all, according to Evercore ISI

Amos Simanungkalit · 14 May 2024729 Views

The Federal Reserve is considering the possibility of cutting interest rates twice this year, with the first cut potentially happening in September. However, if inflation data doesn't show a significant slowdown by then, the Fed may decide against any cuts for the rest of the year.

ISI Evercore forecasts two potential rate cuts starting in September as the most likely scenario, but acknowledges that there's also a possibility of no cuts at all. This forecast reflects ongoing discussions in the market, where the prevailing consensus leans toward two rate cuts for the year.

Supporters of the two-rate cut approach echo Fed Chairman Jerome Powell's view that current monetary policy is restrictive. They attribute recent inflationary upticks to temporary factors and expect inflation to ease in the coming months, making room for rate cuts in September and December. However, if the data doesn't support this view by September, the likelihood of a rate cut by December diminishes significantly.

Should inflation data fail to show sufficient progress, particularly if year-on-year core PCE inflation remains around 3% without any notable weakness in the job market, the Fed may delay any rate cuts until March of the following year. By then, the Fed's prolonged stance on maintaining higher interest rates would have had more time to influence the economy positively, aided by favorable base effects as previous high inflation readings drop out of the comparison.

For the Fed to consider cutting rates earlier than September, several factors would need to align favorably, starting with this week's inflation data releases. A modest increase in April's Producer Price Index (PPI) and Consumer Price Index (CPI) would be necessary, with core PCE inflation not exceeding certain thresholds. Subsequent reports in May would also need to be encouraging to bolster the case for an earlier rate cut, with specific benchmarks to meet for serious consideration in July.