Fed "Not in a hurry to cut rates"... BoA and Deutsche also expect December (Comprehensive)

Officials of the U.S. Federal Reserve (Fed) continue to maintain a cautious stance on cutting the benchmark interest rate. This is due to concerns about a potential inflation rebound, known as the last mile risk?the final stretch before reaching the target. Major Wall Street investment banks such as Bank of America (BoA) and Deutsche Bank have also pushed back their expectations for a Fed rate cut to December.

[Image source=Reuters Yonhap News]

Concerns Over Inflation Rebound: "No Urgency for Rate Cuts"

John Williams, President of the New York Federal Reserve Bank and considered the third most influential Fed official, stated at a symposium in New York on the 11th (local time) that "monetary policy is currently well-positioned, and there is no clear need to adjust it in the very short term." He assessed that neither rate cuts nor hikes are urgent at this point, and more observation of the situation is necessary.

Williams noted that U.S. inflation indicators, which exceeded expectations, are expected to gradually slow to 2%, although "there may be fluctuations during the decline." He emphasized, "We will focus on indicators, economic forecasts, and risks while evaluating the appropriate monetary policy path." He projected that if things proceed as expected, it would be reasonable to gradually cut rates starting this year, with inflation falling to 2.25?2.5% by year-end and achieving the 2% price stability target next year.

On the same day, Susan Collins, President of the Boston Federal Reserve Bank, also stressed caution, saying, "It may take more time to determine whether the economy is on a sustained path toward the 2% price stability target." In a speech at the New York Economic Club, Collins said, "Recent indicators have not materially changed the outlook, but uncertainty about timing and the uneven nature of the disinflation process have increased the need for patience," adding, "This means less policy easing this year than previously thought." She identified the end of this year as the likely timing for a rate cut, later than market expectations.

Thomas Barkin, President of the Richmond Federal Reserve Bank, attending an event in Washington D.C., said the latest inflation data "has not yet reached the level we want." While inflation is moving toward the correct range in the long term, he pointed out that recent data has not increased confidence that disinflation is spreading throughout the economy.

John Williams, President of the New York Federal Reserve Bank [Photo by Reuters]

These remarks drew attention as they came shortly after the release of the U.S. Consumer Price Index (CPI) for March, which significantly exceeded expectations and dampened hopes for a rate cut. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently reflects nearly an 80% probability that the Fed will keep rates steady at 5.25?5.5% through June. This is a marked increase from about 34% a week ago.

Earlier, the Fed maintained its projection of three rate cuts this year in the March dot plot, but recently, officials have increasingly suggested only two, one, or even no cuts might be possible. Given strong economic data and concerns about inflation rebounding, the view that the Fed has no reason to rush rate cuts is gaining traction. Consequently, some market observers expect the year-end rate forecast in the dot plot released after the June Federal Open Market Committee (FOMC) meeting to be revised upward.

However, the U.S. Producer Price Index (PPI) for March, released the same day, rose 0.2% month-over-month and 2.1% year-over-year, falling short of market expectations. Marketfield Asset Management commented, "While this is not an encouraging signal of price stability, the absence of additional negative data is positive," suggesting that the shock from the previous day's CPI report has somewhat eased. Investment bank Goldman Sachs forecasted that U.S. inflation would calm within a few months, given limited upward pressure from oil prices and wages.

[Image source=Reuters Yonhap News]

BoA and Deutsche Bank: "Fed to Cut Rates Only in December"

Wall Street is also leaning toward cautious rate cuts. Bank of America and Deutsche Bank, which initially expected Fed cuts starting in June, have both lowered their expectations. They now predict only a single rate cut in December this year.

The Deutsche Bank team, led by Chief Economist Matthew Luzzetti, stated in an investor memo that "the likelihood of the Fed starting rate cuts has clearly diminished due to recent inflation, strong labor market data, and easing financial conditions," pushing back the first cut to December. They expect the core Personal Consumption Expenditures (PCE) price index, a key inflation gauge monitored by the Fed, to rise by 0.3% month-over-month in both March and April. Deutsche Bank judges this level insufficient to justify a rate cut in July.

BoA similarly analyzed that the core PCE inflation rate for March and April will increase by 0.25% month-over-month, making it difficult to implement rate cuts before December. Michael Gapen, BoA's Chief Economist, said, "Inflation will remain robust in the short term," and "unless there are clear signs of labor market deterioration, the chance of cuts in the third quarter is low." BoA also noted that even a December cut remains uncertain at this point.

Earlier, Nick Timiraos of The Wall Street Journal (WSJ), known as the Fed's unofficial spokesperson, also expressed a negative outlook on rate cuts. He stated that the issue is no longer the timing but whether cuts will happen at all. He predicted that the pace of cuts this year could slow due to "bumpy" inflation and suggested that inflation might remain around 3% instead of moving toward the Fed's 2% target. He warned, "If there is no clear evidence of a significant economic slowdown, rate cuts this year could be completely off the table."

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF)
[Photo by Reuters Yonhap News]

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), warned of the risk of an inflation rebound and cautioned central banks worldwide against the dangers of premature rate cuts. In an appearance on CNBC, she said, "While the Fed is maintaining expectations for rate cuts by year-end, it should not rush into cuts until the data supports it."

Meanwhile, on the same day, the European Central Bank (ECB) kept its key policy rates unchanged but hinted at the possibility of rate cuts in June. The ECB stated, "If we gain confidence that inflation is consistently converging toward the target, it would be appropriate to lower the degree of monetary policy restriction."

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