Bank of America has revised its outlook, suggesting that the first rate cut by the Federal Reserve is less likely to happen in March, with June now seen as the more probable starting point. This shift in perspective comes after a surprisingly hawkish tone from the central bank during the Federal Open Market Committee meeting on Wednesday. Bank of America’s strategists highlight Fed Chair Jerome Powell’s remarks, emphasizing that the committee is unlikely to identify March as the time to cut interest rates unless they gain more confidence in inflation returning to its 2% target.
Investors had previously factored in an aggressive pace of rate cuts for 2024, estimating around 150 basis points by the end of the year, according to the CME FedWatch tool. The unexpected change in the Fed’s stance led to the S&P 500 experiencing its most significant drop of the year. While the likelihood of a March rate cut has diminished, Bank of America suggests that investors might still witness a “later and faster” pace of rate cuts, with the rate cut cycle potentially commencing in June, followed by additional cuts in September and December.
Despite the lowered expectations for a March cut, traders are still pricing in a 72% chance that the Fed will cut rates at least six times by the end of 2024, according to the CME FedWatch tool. Bank of America notes that markets may be suggesting the Fed needs to choose between a “sooner and slower” approach and a “later and faster” one, and currently, the preference seems to be for the latter. Experts have cautioned that rapid Fed rate cuts could have both positive and negative effects on the economy, potentially indicating efforts to stave off a recession. As central bankers maintain the Fed Funds rate target at 5.25%-5.5%, the highest since 2001, investors are now placing a 63% chance on the Fed keeping rates level in March, up from just 12% a month ago.