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- Expectations that the Fed will start cutting interest rates in July briefly spiked up to 50% this past week.
- The increase came on the back of April inflation cooling and further pressure on bank stocks.
- But the Fed is unlikely to swing from 10 straight rate hikes to cuts within two months, a Truist Advisory economist said.
The Federal Reserve appears ready to let its benchmark interest rate coast at the highest level in years, disappointing investors looking for cuts to start this summer, analysts said.
Traders see a nearly 40% chance that policymakers at their July 26 meeting will reduce the key rate by 25 basis points to 4.75%-5%, according to pricing in the fed funds futures market as of Friday.
The probability spiked to nearly 50% over the past week after the release of the April inflation report and another sell-off in regional bank stocks like PacWest.
"I don't think it's misplaced to think that there are cuts coming. But the speed — July pricing in cuts — that's not happening," Mike Skordeles, head of US economics at Truist Advisory Services, told Insider in an interview.
While inflation largely continues to trend downward, hitting 4.9% in April after peaking at 9% last June, it's still hotter than the Fed's 2% target.
Meanwhile, the labor market remains robust, setting up the Fed to pause on rates until at least the end of 2023, Skordeles said. There's even a slight chance that another rate hike in June is in play, he added.
"The Fed tends to cut rates an average nine months after the last rate hike," Sam Stovall, chief investment strategist at CFRA Research, told Insider. "So let's just say early 2024 is when we believe the first rate cut will come."
There's "institutional scar tissue" at the Fed that also makes it unlikely it will swing from a 10th consecutive rate increase to chopping down rates within two months, said Skordeles, pointing to policy missteps made in previous decades.
That's a view shared by CFRA's Stovall.
"The Fed has been telling us for the longest time that they don't want to make the same mistakes as the Fed in the late 70s, early 80s," he said.
That's when policymakers thought they got a handle on high inflation after an initial round of rate hikes. Then they cut rates and inflation re-accelerated.
"They had to start raising rates again. It's like a fireman who was putting out a fire and ends up turning off the water too soon," Stovall said.
High bar
Even with inflation too hot for the Fed's liking, some investors are nervous about rates remaining elevated with economic growth widely expected to weaken and credit getting tighter after the banking crisis, the CFRA strategist said.
Investors are also watching if Congress will lift the $31 trillion debt ceiling, with a deadline looming as soon as June 1. Failure to do is "potentially catastrophic," JPMorgan Chase CEO Jamie Dimon warned this week.
Meanwhile, a raft of data is due before the Fed meets again June 13-14, including the PCE inflation figure and the May jobs report. Traders foresee a nearly 90% chance the Fed will hold its key rate at 5%-5.25% in June.
Skordeles said with so much data to digest, it's a little premature to say the Fed won't raise rates again next month. "There's a high bar for them to hike, but there's an even higher bar for them to be cutting," he said.
What's likely to jumpstart rate cuts is job losses, which could arrive toward the end of this year, Skordeles said. "I don't think we have to get more simplistic than [a monthly payrolls report] with a minus sign on it."