Why the Fed's first rate cut could be delayed until March 2025 if inflation stays stubbornly high

• If the Federal Reserve can't cut interest rates this June, it might delay easing until March 2025, Bank of America said.
• Stubbornly high PCE inflation readings might make it difficult to lower them in June as many expect.
• BofA still expects three rate cuts this year, but says the next PCE readings will determine this.

Monetary easing by June is looking more and more like an out-of-reach dream, tempered by the latest batch of strong economic data.

After data Monday showed the ISM Manufacturing Index expanding for the first time since 2022, odds of a June interest rate cut briefly fell under 50%, according to Bloomberg data. And recent inflation figures — though in line with expectations — also give the Federal Reserve no reason to hurry.

But if the central bank doesn't lower rates by June, it's likely to hold off on any cuts until March 2025, Bank of America wrote on Tuesday. 

The reason? The Fed officially targets the annual change in the personal consumption expenditures, which may make it harder to justify a cut later in the year. 

That's because comparisons with last year's figures mean that year-over-year core PCE inflation is unlikely to decline further in the second half of 2024.

"Base effects for year-over-year core PCE inflation are favorable through May, but unfavorable for six of the last seven months of the year," analysts said in a note. "If the Fed tells markets that a rate cut is not justified in June (by which time it will have the May CPI data in hand), it will be difficult to justify a cut later this year, when y/y core PCE inflation is likely to be flat or slightly rising, even if the three- and six- month rates are falling."

In that case, Bank of America estimates that March is the Fed's next best option. However, analysts did note that the central bank could still cut in June, followed by just one or two rate cuts this year. 

Otherwise, high inflation might not matter if activity slows meaningfully in 2024's second half, prompting the Fed to ease restrictive policy.

For its part, the bank still expects three cuts this year, with a June cut still on the table, citing Fed Chairman Jerome Powell's recent dovish comments.

"But it remains a close call. Prints of 30bp or more on the next two core PCE readings would probably take June off the table, particularly if activity holds up," they wrote.