Wall Street is unhappy with Jerome Powell’s rate cut strategy

Wall Street is fuming over the Federal Reserve’s interest rate strategy. Bank of America’s latest results have exposed the growing tension. The bank’s management expects the Fed to cut rates by a quarter point in September, November, and December. 

However, their chief economist, Michael Gapen, predicts only one 25-basis-point cut in December. But after the cooler-than-expected June inflation data, he now sees a chance for an earlier start.

Financial forecasts usually assume what the Fed might do, often based on derivative contracts. In July, the market-implied odds changed, favoring two Fed rate cuts starting in September and a 50% chance of a third by year-end.

Headquarters of the Federal Reserve in Washington, D.C.

This split within Bank of America shows the wider uncertainty.  Economists, who advise customers on potential market moves, often have different views from their management. Gapen’s forecast is one of the least optimistic among major U.S. banks.

Until recently, a single quarter-point cut by December was a common prediction.  This outlook has now been abandoned by Barclays, BNP Paribas, Deutsche Bank, and JPMorgan, whose economists have adjusted their views to align more closely with market expectations.

Traders are now absolutely certain the Federal Reserve will cut rates by September. The CME FedWatch tool shows a 93.3% chance that the Fed’s target range for the federal funds rate will drop to 5% to 5.25% in September from the current 5.25% to 5.50%. 

There’s also a 6.7% chance of a half-point drop, reflecting some traders’ belief that the Fed might cut rates at both the end of July and again in September.

Jerome Powell. Credits: Reuters

The change in odds was triggered by June’s consumer price index update, which showed a 0.1% decrease from the previous month.

This put the annual inflation rate at 3%, the lowest in three years. A month ago, the odds of a rate cut in September were about 70%.

Fed Chairman Jerome Powell has hinted that the central bank will act by September. On Monday, Powell said the Fed wouldn’t wait for inflation to reach its 2% target before cutting rates, due to the lag effects of tightening. 

He said that: “The Fed is looking for greater confidence that inflation will return to the 2% level. What increases that confidence is more good inflation data, and lately here we have been getting some of that.”