Wall Street is increasingly disappointed with the Federal Reserve’s interest rate strategy, as highlighted by the latest performance of Bank of America.
The bank’s management expects the Fed to lower rates by a quarter point in September, November, and December. However, their chief economist Michael Gapen anticipates only one 25 basis point cut in December, although he now sees potential for an earlier cut following the lower inflation data in June.
Market expectations have shifted, with derivative contracts indicating two rate cuts starting in September, and a 50% chance of a third cut by the end of the year. This reflects broader uncertainty, as economists advising clients often have different views from their leadership. Gapen’s outlook is among the more conservative among major American banks.
The previous consensus was for a quarter point cut by December, but Barclays, BNP Paribas, Deutsche Bank, and JPMorgan adjusted their expectations to align more closely with market sentiment. Traders are now nearly certain that the Fed will lower rates by September. The CME FedWatch tool shows a 93.3% probability that the federal funds rate will be lowered to 5%-5.25% in September, from the current 5.25%-5.50%.
The updated June Consumer Price Index, which showed a 0.1% decrease on a monthly basis, brought the annual inflation rate down to 3%, the lowest level in three years. A month ago, the likelihood of rate cuts in September was around 70%. This significant change was driven by favorable inflation data.
Fed Chair Jerome Powell indicated that the central bank will take action by September. On Monday, Powell stated that the Fed will not wait for inflation to reach its 2% target before cutting rates, citing the lagged effects of previous rate tightening measures. He emphasized that the Federal Reserve aims for greater confidence that inflation will return to 2%, noting recent favorable inflation data as a positive sign.
