The next Fed meeting will take place on June 11-12 with the majority of the market expecting another decision to hold rates steady. They are still some who believe that slower economic data could spark a July rate cut. The options market currently sees a 14% chance of a July interest rate cut but an above 50% chance of a rate cut in September. Andrew Hollenhorst, Citi’s chief economist, recently said that he believes a weakening labor market will be the needed push for a July interest rate cut.
Steve Englander, head of North America Macro Strategy at Standard Chartered Bank and an early rate cut optimist, outlined his thought processes in a letter to investors. His letter was summarized in the following manner by Greg Robb of MarketWatch, “The government will produce two months’ worth of the Fed’s favorite inflation gauge — the personal consumption expenditure index — before the July meeting so “there is considerable room for core PCE to slow.” In addition, despite all the concern with hot inflation readings so far this year, inflation is running below the same pace as last year over the first four months of the year. That gives some credence to the possibility that inflation is hot at the beginning of the year due to seasonal factors that cool off as the year goes on. In addition, there are signs of a softening in the economy, with consumer spending, adjusted for inflation, rising at a 1.1% rate this year. The strong labor market in the first quarter was due mainly to undocumented immigrants gaining permission to seek jobs. Without this boost, employment growth has been “tepid,” he said.”
The overwhelming view in the market is that rate cuts won’t be happening until at least late in the year or even into next year, that doesn't mean that everyone sees it that way or that a summer rate cut is completely off the table. A weakening economy is going to be necessary to cut rates sooner but that may happen with upcoming economic data reports.
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