Jose Luis Magana/AP
- From deeps rate cuts to a potential rate hike in 2024, one firm has changed its forecast in a big way.
- Macquarie said the resilient economy means potential interest rate cuts won't happen until 2025.
- "The next change may be a hike, which would prompt a new wave of broad-based US dollar strength," Macquarie said.
Economists at Macquarie have made a big about-face on their projections for interest rates in 2024.
In December, Macquarie said that the Federal Reserve would aggressively cut interest rates in the second half of the year by as much as 225 basis points. Assuming the central bank moves the federal funds rate down by 25 basis point increments, that would equate to nine interest rate cuts just this year.
That rate cut forecast was driven by "a continued moderation in core inflation and an undesirable rise in unemployment," Macquarie economists David Doyle and Neil Shankar said at the time.
But fast forward just a few months and the economic picture has changed in a big way: inflation has shown signs of rebounding and the US economy, driven mainly by consumers, has remained incredibly resilient.
That lack of economic weakness has led to a stark shift in interest rate forecasts, with even the Federal Reserve suggesting that its initial projections of three interest rate cuts this year could dwindle to one rate cut or even none.
Strategists at Macquarie said in a note on Monday that the chances of a Fed interest rate cut this year are slim to none and that an interest-rate hike is possible. A potential rate hike would shock markets, as few have called for such a move despite a string of hotter-than-expected inflation reports from January through March.
"Fresh US data has prompted our US economist to push out his projection of the start of the Fed's easing cycle to 2025. We also don't rule out that the next change may be a hike, which would prompt a new wave of broad-based US dollar strength," Macquarie said in a note on Monday.
Last week's release of first-quarter GDP growth and PCE inflation data suggested continued "stickiness" in inflation, and solid corporate earnings results continue to illustrate that most of the US economy is on solid footing.
That means that the Fed's upcoming FOMC meeting this week could result in a hawkish press conference from Fed Chairman Jerome Powell on Wednesday.
"We expect, in any case, that the Fed's communications after the FOMC meeting this week will have a uniformly hawkish tone, conveyed primarily through the Statement," Macquarie said.
That could be a double whammy for a stock market that had been largely fixated on interest rate cuts this year.
"What is increasingly ominous too is the prospect that the next policy rate change may be a hike, even if the policy bias at the Fed is unchanged. Even if stock investors ignore that - on the premise that it would be just an offset to better nominal growth in the US - the threat of a hike certainly would prompt a new wave of broad-based USD strength," Macquarie said.
A rising US dollar is a headwind for US companies that have operations overseas, as it reduces their international profits due to currency conversions.
Macquarie wasn't the only firm forecasting aggressive interest rate cuts this year. In December, UBS predicted that a US recession would spark the Fed to cut interest rates by a whopping 275 basis points.