Analysts warn: The Federal Reserve may not cut interest rates this year, US stocks may plummet
American analysts predict that the Federal Reserve may not cut interest rates this year, which could lead to a sharp decline in the US stock market. Some analysts even believe that the Federal Reserve will not cut interest rates at all this year. The market's diminished expectations for rate cuts have increased the likelihood of the Federal Reserve maintaining interest rates in July. If rates do not fall, inflation issues will persist, US Treasury yields will remain high, and the S&P 500 index could fall by 8.5% to 4900 points. Furthermore, some suggest that the Federal Reserve should keep rates unchanged until 2024 to avoid the risk of a stock market bubble burst. However, others argue that the longer rates remain high, the greater the risk of an economic collapse
Last week's US May non-farm payroll data showed a significant increase in non-farm employment and accelerated wage growth, which dealt a blow to market expectations of interest rate cuts - the market has essentially priced in the Fed maintaining rates in July. Some analysts even further predict that the Fed will not cut rates at all this year. Currently, federal funds futures indicate that there will be at least one 25 basis point rate cut in 2024. This is a significant shift for the market, as earlier this year the market expected as many as seven rate cuts by the Fed in 2024.
In the view of Lori Calvasina, Head of US Equity Strategy at Royal Bank of Canada, even a rate cut this year may not materialize. Calvasina believes that if the Fed does not act and the market is priced around loose monetary policy forecasts, indices could fall. She said that if rates do not fall this year, inflation remains more challenging than expected, US Treasury yields remain high, then the benchmark S&P 500 index could fall to a low of 4900 points, an 8.5% drop from current levels.
Others also point out reasons to maintain higher rates for a longer period. Market veteran Ed Yardeni stated in an interview that the Fed should "take a break" and keep rates unchanged until 2024. In his view, the central bank has successfully normalized rates to the appropriate level without harming the economy.
Yardeni said, "If they continue to lower rates unnecessarily, they could cause a 'melt-up' in the stock market, which will bring other problems, as we saw in the late 1990s." He referred to the stock market bubble burst that occurred in that decade. Instead, the market can expect one or two rate cuts in the next 12 months, but not this year.
Meanwhile, David Miller, Chief Investment Officer at Catalyst Capital, also believes that the Fed should not cut rates in 2024, as it would exacerbate inflation.
Of course, there are also those who hold opposing views.
Mark Zandi, Chief Economist at Moody's Analytics, warned on Monday that the longer rates remain high, the greater the likelihood of an economic collapse. He said in an interview, "In my mind, this system is like an engine, shaking very violently under the pressure of higher rates. So far, with the help of the Fed and banking regulators, it has remained stable. But for how long? Why?"