The latest research from the Federal Reserve: Interest rate cuts may not happen until 2026!

The latest documents from the Federal Reserve indicate that interest rate cuts may not occur until 2026.

Last week, two economists from the Kansas City Fed, Johannes Matschke and Sai Sattiraju, stated in their latest paper that in order to bring the inflation rate down to 2%, the Federal Reserve may have to keep interest rates at a higher level (above 5%) for a longer period of time than expected, possibly until 2026.

Economists point out that despite the Fed tightening policy at the fastest pace since the 1980s last year, the surge in inflation has pushed the equilibrium level of interest rates in the US economy to rise at a faster pace. It is for this reason that the policy level did not enter the restrictive range until the first quarter of 2023.

The latest data shows that the annualized GDP growth rate for the first quarter in the United States is 2%. Economists believe that given the strong pace of economic growth in the United States, the Federal Reserve may need to keep interest rates at the current level or above for more than three years in order to bring the core PCE index, the inflation measure favored by the Fed, back to the Fed's target level of 2%.

Torsten Slok, Chief Economist at Apollo Global Management, pointed out that this could make the upward trend of US stocks in the first half of the year more complicated, causing the S&P 500 index to give back some of its nearly 16% gains so far this year, as investors gradually digest the view that "interest rates will not decline quickly."

The "FedWatch" tool from the Chicago Mercantile Exchange (CME) shows that traders expect the Federal Reserve to raise interest rates at least once this year.

The Federal Reserve has also made similar statements. On June 28, at the central bank forum held by the European Central Bank, Federal Reserve Chairman Powell stated that the Federal Reserve may raise interest rates again as early as next month, and did not rule out the possibility of raising rates at two consecutive meetings. He reiterated that most Fed policymakers' projections indicate that they expect at least two more rate hikes this year.

Powell also stated at a hearing last week that he expects the inflation rate to not reach the Fed's 2% target before 2025, which means that the Fed will not cut interest rates for a period of time after that. However, trading in the federal funds futures market shows that traders once again refuse to believe his words and expect the Fed to cut rates in 2024.