Interest rate cut clock stopped? Tonight, focus on the Federal Reserve

Tonight, it seems that the Fed's decision not to cut interest rates is already set in stone.

At 2:00 pm Eastern Time on Thursday, May 1st (2:00 am Beijing Time on Thursday, May 2nd), the Federal Reserve will announce its interest rate decision. Fed Chair Powell will hold a monetary policy press conference half an hour after the rate decision is announced.

The market generally expects that until there is more confidence in controlling inflation, the Fed will continue to maintain its current restrictive policy stance. This FOMC meeting is expected to keep interest rates at a high level for over two decades, maintaining the federal funds target range at 5.25-5.50%.

Due to persistent inflation, expectations for rate cuts in 2024 have been repeatedly delayed this year. Traders currently expect the Fed to cut rates only once this year, far below their initial expectations of around 6 times.

Powell stated in his last speech that policymakers may keep rates high for longer than previously expected, explaining that there has been a lack of further progress in reducing inflation and the labor market remains strong.

Possibly the third consecutive "stand pat" decision

As of the time of writing, the CME Group's FedWatch tool shows that the probability of the Fed maintaining interest rates in May is nearly 97%.

Since the beginning of the year, the Fed has announced no change in interest rates at the January and March FOMC meetings.

According to Wall Street reports, Goldman Sachs, Citigroup, Morgan Stanley, JPMorgan, Nomura, and other 10 major Wall Street banks all predict that the Fed will keep rates unchanged in May.

UBS analysts also pointed out in their research report that the Fed's monetary policy stance is unlikely to change this time, with the main focus being on Fed Chair Powell's remarks at the post-meeting press conference.

Will there be further rate cuts later this year?

What is the path for future rate cuts?

The CME Group's FedWatch tool shows that investors have pushed back rate cut expectations to November, with an 88.5% chance of no change in June, compared to 55.2% on the eve of the March FOMC meeting.

Analysts at Bank of America Merrill Lynch led by Michael Gapen stated in their report that given recent inflation data has not given the Fed confidence to start an easing cycle, a rate cut in June is now highly unlikely. They have postponed the first rate cut expectation to December and raised the terminal rate expectation for 2026 to 3.50-3.75% Bank of America Merrill Lynch believes that although confidence in the speed of cooling inflation has decreased, the Federal Reserve will not abandon its basic expectation of declining inflation.

HSBC is more optimistic, with analyst Ryan Wang stating in a report that the Fed is expected to cut interest rates by 25 basis points every quarter starting from June, until the third quarter of 2025.

Wang pointed out that the PCE price index is a key factor for rate cuts, the Fed needs to see core PCE prices decline to around 2.5% before starting to cut rates. The latest data shows that the year-on-year growth rate of core PCE prices in March has slightly increased to 2.82%.

Citigroup believes that the Fed may start cutting rates this summer, with the possibility of a rate cut in July increasing relative to June, and points out that the expectation of completely ruling out rate cuts this year is too aggressive.

On the other hand, a more pessimistic view suggests that not only will the Fed not cut rates this year, but it may also raise rates again.

Former Chief Economist of the National Economic Council, LaVorgna, stated:

"At present, this means that the Fed will not cut rates. If (inflation) does not decrease, the Fed will either have to raise rates at some point or maintain higher rates for a longer period of time. Will this eventually lead us to a hard landing?"

Bank of America Merrill Lynch points out that there are two catalysts that could prompt the Fed to switch to raising rates next: one is an acceleration in core and overall inflation, and the other is an upward revision in inflation expectations.

Slowing Down the Implementation of QT?

Analysts currently have differing views on when to end quantitative tightening, but generally expect a gradual slowdown in the pace of QT.

At the FOMC meeting in March, Powell stated that the committee generally believes that it is appropriate to "soon" slow the pace of balance sheet reduction, with Wall Street interpreting this statement as a signal from the Fed that it will soon implement a slowdown in QT.

HSBC expects the Fed to announce a slowdown in the pace of QT at this meeting, with the scale of balance sheet reduction including U.S. Treasuries and Mortgage-Backed Securities (MBS) decreasing from around $800 billion per month to around $500 billion per month. Conversely, if the Fed does not announce a slowdown in QT as scheduled, Powell may also provide new wording on the topic and may hint that related decisions will be made in June or July.

UBS also believes that the plan to slow down QT will be announced in June and formally implemented in July.

However, Bank of America Merrill Lynch expects that considering the stickiness of overnight reverse repurchase (ON RRP) balances, indicating that liquidity in the market is still far from depleted, the Fed may continue to maintain the current pace of balance sheet reduction. However, Bank of America Merrill Lynch also points out that the Fed may announce a reduction in the maximum monthly limit for the redemption of maturing Treasury securities from $600 billion to $300 billion, which could also help slow down QT