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How Wall Street thinks the Fed will maintain interest rates

by SuperiorInvest

In early 2024, investors expected the Federal Reserve to cut interest rates substantially this year as inflation cooled. But price increases have been surprisingly tenacious, and that's forcing a rethink on Wall Street.

Investors and economists are wondering when and to what extent Fed policymakers will succeed in lowering rates, and some are increasingly doubtful that Fed officials will succeed in lowering rates this year.

Inflation was falling steadily in 2023, but that progress stalled in 2024. The Fed's preferred inflation index rose 2.8 percent in March from a year earlier, after excluding volatile food and fuel costs. fuel, Friday's data showed. While that figure is substantially lower than the 2022 peak, it is still well above the central bank's 2 percent target.

The stickiness of inflation has led Federal Reserve officials to signal that lowering interest rates could take longer than they had previously anticipated. Authorities raised interest rates to 5.33 percent between March 2022 and last summer, and have kept them there since. Investors who began the year expecting a first rate cut by March have pushed those expectations back to September or later.

Some analysts are even starting to question whether the Fed's next move could be to raise rates, which would be a huge setback after months in which Wall Street overwhelmingly expected the Fed's next move to be a cut.

But most economists think the Federal Reserve would have a hard time changing course so drastically.

“It's certainly a possible outcome, but it would require an absolute acceleration of the inflation rate,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

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