According to reports, economists at Macquarie, one of Australia's largest banks, have made a significant shift in their predictions for interest rates in 2024.
Last December, Macquarie economists David Doyle and Neil Shankar stated that the Federal Reserve would significantly lower interest rates by up to 225 basis points in the second half of this year. Assuming the Federal Reserve cuts the federal funds rate by 25 basis points each time, it would be equivalent to cutting rates 9 times this year, making it the most dovish economist at the time.
They believed at the time that the expectation of interest rate cuts was driven by a combination of sustained mild core inflation and rising unemployment rates.
But just a few months later, the economic situation underwent significant changes: inflation showed signs of rebounding, and the US economy, mainly driven by consumers, still maintained incredible resilience. This has led to both the Federal Reserve and the market delaying this year's interest rate cut schedule. The Federal Reserve has previously hinted that its initial expectation of three rate cuts this year may be reduced to one rate cut, or even no rate cut.
Macquarie strategist stated in a report on Monday that the likelihood of the Federal Reserve cutting interest rates this year is very low, almost zero, and it is possible to raise rates. The potential interest rate hike will have an impact on the market, as although a series of inflation reports from January to March exceeded expectations, few people anticipated a rate hike this year.
"The latest US data has prompted our US economist to postpone his forecast for the start of the Federal Reserve's easing cycle until 2025. We also do not rule out the possibility of the next change being interest rate hikes, which will trigger a new round of comprehensive US dollar strength," the company said.
The Federal Reserve is expected to adopt a hawkish tone
The first quarter GDP growth and personal consumption expenditure (PCE) inflation data released last week indicate that inflation remains "sticky", while robust corporate performance continues to indicate that most regions of the US economy are on a solid foundation. This means that Powell will give another hawkish speech at the press conference after the interest rate resolution is announced this week.
Macquarie said, "Anyway, we expect the Fed's wording after this week's FOMC meeting to adopt a unified hawkish tone, mainly conveyed through statements."
For the stock market, which is mainly focused on interest rate cuts this year, this may be a double blow.
"Another increasingly ominous prospect is that the next policy rate change may be a rate hike, even if the Federal Reserve's policy inclination remains unchanged. Moreover, the threat of rate hikes is sure to trigger a new round of comprehensive US dollar strength," said Macquarie.
The company also added that for US companies operating overseas, the appreciation of the US dollar is a disadvantageous factor as it reduces their international profits generated by currency conversions.