Wall Street sours over lack of 2024 interest rate cuts

MANHATTAN (CN) — Equities fell this week over fears that due to persistent inflation, the Federal Reserve may not cut interest rates at all in 2024.

By the closing bell on Friday, the Dow Jones Industrial Average had shed 380 points, while the S&P 500 declined 27 points. The Nasdaq — which on Monday had notched a new record high of 17,019 points — dropped 185.

“The Fed might not cut interest rates in 2024,” said Larry Tentarelli, chief technical strategist for the Blue Chip Daily Trend Report. “Our view is that the Fed would rather keep rates higher for longer to ensure that inflation comes down to their target level.”

The latest inflation reading, released on Friday by the U.S. Bureau of Economic Analysis, showed that the personal consumption expenditures index (PCE) increased by 0.3% last month, while prices excluding those for food and energy held for the month at 2.8% annualized.

One of the Federal Reserve’s go-to indicators of inflation, the PCE came in about where analysts had predicted. Troublingly, though, it shows inflation has not yet reached the 2% mark the central bank has repeatedly cited as its goal.

“With four more inflation reports to go between now and the September [Federal Open Markets Committee] meeting, we still think there is a good chance the Fed will cut rates at that meeting,” Michael Pearce, deputy chief U.S. economist at Oxford Economics, wrote in an investor’s note.

“Along with a weaker job market, we think that will be enough to give officials the confidence they need that inflation is on a sustained path back to 2%, even though headline and core inflation rates will likely still be elevated,” he wrote.  

The Bureau of Economic Analysis also noted that aggregate real spending fell by 0.1% in April — even after the downward revision to real spending from March.

Some experts say the Fed may try to relax its hawkish approach to interest rates to achieve a soft landing.

“An important question for the Fed that has been raised within the FOMC [Federal Open Market Committee], as well as among former Fed officials, is whether the focus on reaching 2% is appropriate and if 2.5% to 3% is a more realistic goal,” said Quincy Krosby, chief global strategist for LPL Financial. Still, he noted central bank chair Jerome Powell never said monetary easing was dependent on reaching 2%.

“The overriding concern is whether current policy punishes those who can least afford higher interest rate, coupled with still-higher prices,” Krosby added. “The last mile towards 2% remains but the question is still how much more the Fed needs in terms of slower inflation before initiating an easing cycle.”

Earlier in the week, the BEA also released its revised estimate of gross domestic product for the first quarter of this year. While the downward revision to 1.3% from the initial estimate of 1.6% was disappointing for Wall Street, it was not catastrophic.

The downward revision also points to a slowing economy — good news for investors clinging to hopes the Fed will slash interest rates in the fall.

Also supporting the case for slowing growth was the Fed’s own Beige Book, which found most of the central bank’s district reported slight or modest growth.

“Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risks,” the report stated.

Follow @NickRummell

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