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Here’s what Wall Street sees for Fed rate cuts after inflation fell in May


  • The latest inflation figures have strengthened the case for a looser monetary policy.

  • Investors cheered May’s dovish inflation report, which could pave the way for Fed easing this year.

  • Rate cuts in September are “overwhelmingly likely,” one economist said.

Wall Street is a lot more optimistic about the interest rate path this year.

On Wednesday, investors cheered a positive consumer price index report for May. Consumer prices fell below economists’ expectations for the second month in a row.

Inflation was flat last month, rising 3.3% year over year, the Bureau of Labor Statistics reported, a data point that could put the Federal Reserve back on track to ease policy later this year after a series of discouraging inflation reports in the first quarter. .

According to the CME FedWatch Tool, three more rate cuts are on the table by the end of 2024, with investors seeing a 72% chance that the Fed could cut rates three or more times by December.

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Some Wall Street analysts predict the Fed’s first cut could come as soon as July, though most see a September rate cut as the most likely scenario.

“Wednesday’s weaker-than-expected CPI will allow the Fed to start cutting rates as early as September, as we have now seen several encouraging inflation data following the worrying inflation spike earlier this year,” said Skyler Weinand, Chief Financial Officer Investment Officer. of Regan Capital, said in a note. “There is a clear path to a soft landing and the Fed could come to the market’s rescue in just three months.”

“Today’s news appears to open the door for a rate cut in July, although we still see that as highly unlikely given the Fed’s hawkish rhetoric recently,” Preston Caldwell, Morningstar’s chief U.S. economist, said in a statement. “But rate cuts starting in September should now be classified as overwhelmingly likely.”

Overall inflation has declined, partly due to falling gas and food prices. BLS data shows the gas index fell 3.6% in May. Meanwhile, the food-at-home index held steady after falling 0.2% in April.

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“The Fed is increasingly risking a downturn in the economy by leaving rates too high for too long,” Ryan Severino, BGO’s chief economist, said Wednesday. “While our models suggest the Fed could make cuts later this year, it does not have infinite time, especially as we see increasing signs of a slowdown in the US economy.”

Investors are awaiting Fed Chairman Jerome Powell’s speech later Wednesday afternoon, which should give markets more guidance on the path of rate cuts. But the top central banker is unlikely to issue any rate cut signals for a while, Weinand said, thanks to higher-than-expected inflation rates throughout the first quarter.

“Things are progressing as the Fed had hoped, so Jerome Powell will likely feel good this afternoon,” David Russell, TradeStation’s global head of market strategy, said in a note. “The bears have nowhere to run and nowhere to hide.”

Read the original article on Business Insider

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