HSBC:
the timing for a 2024 Fed rate cut remains highly uncertain but is broadly consistent with our view that y-o-y core PCE inflation may fall modestly this summer but then increase somewhat into year-end
We're now expecting 25bps of Fed rate cuts in 2024, the accumulation of data this year showing resilient economic growth and sticky core inflation
ING:
we maintain our view that the decrease in roll-off is quite anticipatory. We continue to identify an excess of liquidity in the system, comfortably in excess of $750bn. The latest data show $500bn going back to the Fed on the reverse repo facility, which is the market posting liquidity back to the Fed. And bank reserves are still some $250bn above the $3tr market above which they are seen as ample. On the lower monthly numbers, the Fed will continue with QT right through 2024 and well into 2025.
We are forecasting the first move coming at the September FOMC meeting with two further cuts in November and December versus the consensus forecast of 50bp of cuts this year.
However, to deliver a cut we would likely need to see at least three 0.2% MoM core inflation prints and the unemployment rate trend upwards to perhaps 4.2% or above. Given the current strength in the economic numbers the risks are skewed towards the Fed moving later and more slowly than we are currently forecasting.
ABN Amro:
Overall, while essentially endorsing the recent moves by financial markets to price out rate cuts, our sense was that Powell is continuing to give the data the benefit of the doubt and will be ready to pivot the other way if inflation were to turn around again over the coming months. Assuming the Q2 inflation data prove to be more benign than in the first three months of 2024 (as we expect - see here), we continue to see a pathway for the Fed to start gradually lowering rates from July.
all proceeds above that cap are now to be reinvested in Treasurys – in line with the Fed’s longer-term plan to gradually eliminate its holdings of MBS. In emphasising that this should have limited implications for the stance of monetary policy, Powell stated that the slowing in QT does not change the likely end-point for the balance sheet. Rather, the pathway to that end-point will be more gradual, giving the Fed greater leeway to respond to liquidity conditions, with a view to avoiding the market turbulence of 2018.
Commerzbank:
all this suggests that the first rate cut of 25 basis points is unlikely until December. This would mean that the interest rate peak of 5.50% would last for 17 months, longer than in recent cycles. At that time, however, there was no inflation problem. In any case, we only see a relatively limited potential for interest rate cuts of 75 basis points in total to 4.75% in spring 2025, as inflation is likely to remain above target in the longer term due to the tight labor market and structural factors such as demographics and protectionism
Natixis:
Overall, the communication from the official statement and from Powell suggests that the Fed is willing to take a steady as she goes approach to policy. This indicates, if indeed policy is restrictive, that the Fed is still taking caution on both sides of the inflation and jobs mandate. This keeps two cuts on the table for this year, though a string of disinflationary prints will be needed for the Fed to pull the trigger in September, as we suspect it will
Rabobank:
We don’t expect the FOMC to cut rates because of progress on the inflation front. Instead, we think it is more likely that a weaker labor market in the second half of the year is going to do the trick. Our view is that the US economy is heading toward stagflation, from the current situation of persistent inflation and GDP growth slowdown. It is no coincidence that Powell opened the door to rate cuts because of a deterioration in the labor market at the March meeting. Although the FOMC projections show only a modest rise to 4.0% unemployment in the final quarter of the year from 3.8% in March, assuming that a strategy aimed at slowing down labor demand is not going to raise unemployment significantly is rather optimistic. The FOMC seems well aware of this
TD:
For the Fed to gain confidence, it needs the economy to show some signs of cooling. But with consumer spending running at a 2.5% quarter-on-quarter annualized pace, there is little evidence that demand-driven inflation will ease soon. This has markets currently fully priced for just one 25 basis point rate cut in 2024, expected in December. That is a huge shift from the 150 basis points of cuts that was expected just a few months ago. This has pushed up Treasury yields by nearly 1 percentage point from this year's lows. Any further hawkish comments from the Fed could continue this trend and push yields up towards 2023 highs.
We do not view the change to the Fed's Quantitative Tightening policy as a dovish tilt. Rather, the Fed is moving more slowly with QT to ensure it doesn't overstep and create volatility in the Treasury market like it did in 2019.
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