Federal Reserve officials have recently made frequent statements to suppress market expectations of interest rate cuts, but the US stock market is still thriving.
Bank of America analysts believe that this is a market bet that the Federal Reserve will make a strategic mistake - although it is almost impossible for the Fed to cut interest rates in March, the market expects the Fed to cut rates more quickly and significantly for the rest of this year.
Market bet: The Federal Reserve made a mistake
Since Federal Reserve Chairman Powell almost explicitly stated in his January interest rate resolution last week that there will be no interest rate cuts in March, he reiterated his position on a television program aired on Sunday Eastern Time that the Federal Reserve will not cut rates too quickly.
Powell emphasized that the possibility of a rate cut in March is unlikely, and sustained "good data" is still needed to prove that inflation has cooled before the rate cut can be initiated.
However, this statement does not seem to dampen investors' optimism, and the rise in the US stock market seems to have reached an unreasonable level: after the strong US non-farm data was released last Friday, although the market's bet on the Federal Reserve's March rate cut further decreased, the US stock market still rose, and the S&P and Dow Jones continued to hit historic highs.
Bank of America analyst wrote:
"Powell's tough statement lowered expectations for a rate cut in March, but the market still expects to cut rates about six times this year... In our view, this indicates that they have included a policy error in their pricing."
In the dot matrix chart from December last year, Federal Reserve officials expected three interest rate cuts in 2024. However, the market is still expecting the Federal Reserve to cut interest rates more than that: some even expect up to six times.
From "earlier and slower" to "later and faster"
Under the pressure of the Federal Reserve, the market's expectations for the first rate cut have indeed been delayed: previously, CME Federal Reserve observation tools showed that traders were betting that the likelihood of the Fed turning in early March was as high as 70%; Now, under the suppression of the Federal Reserve, this expectation has dropped to around 20%.
However, the Federal Reserve has failed to dispel market expectations for a rate cut this year: the market still expects the Fed to cut interest rates more than four times this year.
Bank of America analysts wrote, "At the January meeting, we believed that it was more important for the Federal Reserve to delay market expectations for the speed of rate cuts, rather than the timing of the first rate cut... However, the Fed had the opposite effect."
"The market may argue that the Federal Reserve needs to make a choice between 'earlier and slower' and 'later but faster'. Currently, it is choosing the latter option. We agree that the risks facing our new benchmark are tilting in this direction."
After Powell's hawkish remarks this week, many Wall Street bulls are more certain that they will cut interest rates. Others believe that the real mistake lies in the Federal Reserve cutting interest rates too early.
The analyst wrote, "If the Federal Reserve wants to cut interest rates at a quarterly pace, it still has a lot of work to do in driving market pricing, and it could potentially trigger meaningful financial tightening."