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Central Banks Are Cutting Interest Rates: Will The Fed Be The Next To Move?

The two interest rate cuts made this week by the Bank of Canada (BoC) and the European central bank (ECB) likely marked the beginning of a phase of policy easing among major central banks.

On Wednesday, the Bank of Canada cut its policy rate by 25 basis points to 4.75%, citing that “monetary policy no longer needs to be so restrictive” amid “continuing evidence” of disinflation.

The ECB did the same on Thursday with a cut of 25 basis points, considering it “appropriate” to moderate the tightening of monetary policy after nine months of keeping rates stable.

However, the ECB also revised upwards inflation projections for this year and next, tempering enthusiasm for the start of the rate cut cycle.

The messages from central banks are clear: there is a shift towards a lower level of policy tightening as progress on inflation progresses.

More than three years since the Federal Reserve’s first interest rate hike, there is growing speculation about when and how quickly the U.S. central bank will move toward easing policy.

The Federal Reserve will meet next week on June 12, but no changes in interest rates are expected.

Last month, Federal Reserve Chairman Jerome Powell He emphasized that it would probably be appropriate to keep the current policy rate at a restrictive level “for longer than thought” to gain greater confidence that inflation is moving sustainably towards the 2% target.

Therefore, the July meeting is also not on investors’ radar for the Fed’s first rate cut.

Current market expectations, as implied by Fed futures, price in 21 basis points of cuts by September 2024, suggesting a more likely chance of the first rate cut at the September 18 meeting. 2024.

Currently, market participants expect the Federal Reserve to make two rate cuts by the end of the year, followed by an additional cut by the end of the first quarter of 2025. Between now and December 2025, markets expect the Federal Reserve to reduce rates. interest rates five times.

Month Market prices # of rate cuts (full priced)
September 2024 21 basis points 0
December 2024 52 basis points 2
March 2025 77 points per second 3
June 2025 101 basis points 4
September 2025 120bps 4
December 2025 135bps 5
Data: TradingView, as of June 6, 2024

While market participants are currently pricing in the aforementioned Fed rate cut cycle, a wide range of opinions is evident among top investment bank analysts.

Goldman Sachs, in the more “dovish” camp, projects two rate cuts in 2024, starting in September, followed by four additional cuts in 2025, expecting continued progress on disinflation.

By contrast, Bank of America has one of the toughest views on the street and is not predicting any rate cuts before December 2024.

“We think Powell preaches patience when it comes to cuts and the average member should project a later start to the easing cycle. Inflation has delayed cuts, but the Federal Reserve has not changed its view of fundamentals,” BofA economist. Miguel Yawn he wrote in a recent note.

Bank of America still expects the first rate cut in December 2024, followed by four 25 basis point cuts in 2025.

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