With the recent strong rise in US stocks, several Federal Reserve officials emphasized to the market last week that the speed of the Fed's interest rate cuts will be slower than investors expected, and the magnitude of the cuts will not be as aggressive as investors expected.
But Wall Street seems to have turned a deaf ear to the statements of Federal Reserve officials. Not only do US stocks continue to rise, but several investment banks on Wall Street also expect the Federal Reserve to significantly lower interest rates this year.
The Federal Reserve cannot quench the enthusiasm of the market
At the December Federal Reserve's interest rate decision, the dot matrix indicated that the Fed is expected to cut interest rates three times in 2024. However, the market expects that the actual rate and magnitude of interest rate cuts by the Federal Reserve will be more aggressive than this, and as a result, the US stock market has further strengthened its upward trend.
Last week, several Federal Reserve vote commissioners spoke out one after another, hoping to dampen market expectations for a "significant interest rate cut.".
Last Tuesday, Federal Reserve Director Christopher Waller emphasized that the Federal Reserve should cut interest rates "in an orderly and cautious manner" and never "hastily"; Last Wednesday, Atlanta Fed Chairman Bostic predicted that the Fed's start of interest rate cuts would be delayed until the third quarter, far from the market's expected March; Last Friday afternoon, San Francisco Fed Chairman Mary Daley also emphasized that policymakers must be "patient" with interest rate cuts.
However, according to data from the CME FedWatch tool, as of last Friday, the market still expects the Federal Reserve to cut interest rates at least 5 times this year, and many people predict that the Federal Reserve may cut interest rates 6 or even 7 times this year.
The US stock market has also continued to be strong. Despite being suppressed by the Federal Reserve, major stock indexes in the US stock market fell last Tuesday and Wednesday, but were boosted by TSMC's optimistic 2024 guidance on Thursday, causing the US stock market to rise again. As of Friday's close, both the Dow Jones and S&P 500 indexes reached historic highs, while the Nasdaq index reached its highest level in two years.
Wall Street still expects the Federal Reserve to significantly lower interest rates
The main investment banks on Wall Street still have higher expectations for the Fed's interest rate cut this year than the Fed itself - and believe their expectations are already conservative enough.
Goldman Sachs economists still predict that the Federal Reserve may start lowering benchmark interest rates in March this year and cut rates a total of five times this year. Goldman Sachs economist Jan Hatzius wrote in a report, "We expect to cut interest rates' only '5 times this year, which is lower than the 6-7 rate cuts currently reflected in market pricing."
Bank of America CEO Brian Moynihan is also the most conservative faction on Wall Street. He predicts that the Federal Reserve may cut interest rates eight times in the next two years, which is consistent with the expected number of times in the Federal Reserve's chart. But he also emphasized that even after the Federal Reserve cut interest rates by this magnitude, the interest rate level remains high.
Moynihan stated at the World Economic Forum that he predicts the Federal Reserve will cut interest rates by 200 basis points in the next two years. He emphasized that these interest rate cuts are necessary to boost the US economy. After the rapid interest rate hikes by the Federal Reserve in 2022 and 2023, the US economy has slowed down on many indicators.
Moynihan believes that although the eight rate cuts may sound radical at first glance, given that interest rates hovered slightly above 0% during the pandemic and had already been at historic lows in the previous decade, even if the Federal Reserve cuts rates rapidly at this rate, the Fed's interest rate levels will actually remain high for a longer period of time, sufficient to control inflation.
"Basically (the Federal Reserve) is saying that they will have to start lowering interest rates because they have room to do so in order for the economy to continue growing. The last thing they want to do is mess things up... unless there is too much resistance, they must start lowering interest rates."
The latest estimate from economists at the Federal Reserve Bank of New York is that the likelihood of the US economy falling into recession by the end of this year is 63%, up from around 50% a month ago. Federal Reserve officials will begin their next policy meeting on January 30th, during which they are expected to reveal more details about expected interest rate cuts.