Wall Street takes turns pouring cold water! Bridgewater CIO: Fed rate cut expectations have "gone off track"
Wall Street investment banks have adjusted their expectations for the Fed's interest rate cuts this year. Bridgewater's CIO stated that US inflation and strong economic growth have caused the rate cut expectations to "derail", with Morgan Stanley's chairman predicting that rates may rise to 8%. Vanguard Group believes that the Fed will not cut interest rates this year, which could have an impact on global central banks and markets. Investors have seen a shift in expectations for Fed rate cuts, with futures traders betting on the smallest rate cut since last year. Currently, Fed fund futures are pricing in a 60 basis point cut for this year
Inflation expectations resurge as the labor market heats up, seemingly supporting the view that the "Fed is not in a hurry to cut interest rates". On the eve of the release of the March CPI, Wall Street investment banks began to pour cold water on this year's interest rate cut expectations.
On April 9th, Bob Prince, Co-Chief Investment Officer of Bridgewater Associates, stated that the sustained inflation and continued economic strength in the United States have caused the Fed's interest rate cut expectations for this year to be "off track".
As several Fed hawks made statements and non-farm payroll data surged beyond expectations, more and more economists on Wall Street are starting to predict that there may not be any interest rate cuts this year.
Jamie Dimon, Chairman and CEO of JPMorgan Chase, also stated in the annual shareholder letter that in the coming years, inflation and interest rates in the United States may remain higher than market expectations, preparing for the Fed to raise rates to as high as 8%.
Dimon believes that although many key economic indicators continue to improve and inflation is showing signs of slowing down, looking ahead, there is still upward pressure on inflation, and high inflation may persist, with government spending further expanding.
In March, Vanguard Group stated that the Fed is unlikely to cut interest rates this year, and if this expectation comes true, it may have an impact on central banks and markets worldwide. Vanguard Group's Senior Economist Shaan Raithatha believes that market expectations will continue to change based on economic data: "Everyone knows that the market's expectations for the number of interest rate cuts this year have dropped from seven times at the beginning of the year to three times."
Since the beginning of this year, investors' expectations for the magnitude and timing of Fed interest rate cuts have rapidly changed. According to the latest data from the London Stock Exchange Group (LSEG), futures traders' bets on the magnitude of Fed interest rate cuts this year have dropped to the lowest level since October last year. Currently, the Fed funds futures December contract shows an expected interest rate cut of about 60 basis points for this year, while the expected interest rate cut at the beginning of 2024 is around 150 basis points.
As a result of interest rate expectations, bond yields have risen. The 10-year U.S. Treasury yield, known as the "anchor of global asset pricing", briefly touched a year-high of 4.464% this week, with bond bears seemingly ready to challenge the 4.50% mark this week.
