Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, stated on Tuesday that the strength in the real estate market has to some extent fueled the stagnation of inflation, leading the Federal Reserve to consider keeping interest rates unchanged for a “considerable period” or even throughout the year. Additionally, Morgan Stanley has revised its forecast for the timing of the first interest rate cut from July to September in its latest report.
The Federal Reserve (Fed) maintained the federal funds rate at a high point between 5.25% and 5.5% for the 23rd consecutive time on the 3rd, combating stubborn inflationary pressures. Fed Chair Powell admitted after the meeting that officials’ confidence in cutting interest rates would take longer than originally anticipated. However, he also soothed the market by signaling a dovish stance, stating that the central bank’s next move is unlikely to be a rate hike.
Neel Kashkari, a hawkish official of the Federal Reserve, emphasized at the Milken Institute Global Summit on the 7th that the strength of the real estate market has contributed to the stagnation of inflation to some extent, necessitating the Federal Reserve to maintain interest rates unchanged for a “considerable period.”
According to reports from Reuters and Bloomberg, Kashkari, who does not have voting rights on the Federal Open Market Committee (FOMC) this year, stated at the meeting:
“However, he also stressed that a rate hike is not the most likely scenario and that the threshold for a rate hike is quite high, but he does not rule out the possibility. He needs to see multiple positive inflation data points indicating that the deflationary process has been put on track before supporting a rate cut.”
Kashkari also wrote yesterday that recent inflation data, especially strong demand in the real estate market, suggests that the Federal Reserve’s policies may not be as tight as officials suspected, enough to bring the inflation rate back to the Fed’s target of 2%, but may stabilize at around 3%, which could mean that the Federal Reserve needs to do more to curb inflation.
In response, Kashkari also raised his forecast for the long-term neutral interest rate (neither restrictive nor stimulative to the economy) from 2% to 2.5%, implying that FOMC policymakers may underestimate the neutral rate. Previously, Kashkari had predicted two rate cuts this year at the March meeting, but on Tuesday, he said he would predict either 2 or 0 rate cuts within 2024, depending on the forthcoming inflation data.
When can we expect the much-anticipated rate cut? Wall Street giant Morgan Stanley analysts believe that the timing of the first rate cut in the United States may be pushed back to September.
According to Seeking Alpha, Morgan Stanley analysts revised their forecast for the timing of the first rate cut from July to September in a report released on the 7th to address sticky inflation. However, the institution still “favors” three rate cuts by the Federal Reserve this year, each by one percentage point.
Ellen Zentner, Chief US Economist at Morgan Stanley, wrote in the report:
“Zentner further noted that the risk of a rate cut in September would be lower than in July because by then, the FOMC would have received an additional five Consumer Price Index (CPI) reports and four Personal Consumption Expenditures (PCE) reports, allowing the FOMC to see inflation rates indeed fall back to the 2% target, giving it enough confidence to initiate a rate cut.”
Morgan Stanley also forecasts that by the end of 2024, the annualized three-month and six-month core PCE (excluding seasonal food and energy prices) will be close to or below 2%. It also estimates four rate cuts by mid-2025, each by one percentage point.
The US Federal Funds Rate futures market also bets on the Federal Reserve’s first rate cut in September. According to the CME FedWatch tool, the probability of a 1 percentage point rate cut by the FOMC in September is approximately 49%, higher than the 35.2% chance of another freeze and the 14.8% chance of a 2 percentage point rate cut.
The probability of maintaining the rate in the current range at the FOMC meetings in June and July is currently 91.1% and 70.4%, respectively.