Due to expectations that the Federal Reserve will significantly lower interest rates, Wall Street analysts have recently been optimistic that US stocks will continue to rise this year. However, according to a report released by international investment bank Macquarie on Wednesday, investors overestimated the possibility of a soft landing in the US economy, and the Federal Reserve will not cut interest rates soon.
"We tend to believe that interest rate cuts will not come soon. Before lowering policy rates, the Federal Reserve must first shift towards a neutral policy orientation and then towards a loose policy orientation," said Macquarie.
As for when the Federal Reserve will start cutting interest rates, Macquarie believes it is most likely in the second half of 2024, especially with signs of slowing US economic growth.
The minutes of the Federal Reserve meeting released on Wednesday show that some hawkish officials believe that the target interest rate still needs to be maintained at the current level, and the duration should be longer than currently expected.
Before the minutes were released, this year's Federal Reserve vote committee and Chairman of the Richmond Fed, Barkin, stated that although a soft landing of the US economy is more likely, it is not inevitable and the Federal Reserve may still raise interest rates further.
Investors initially had overly aggressive expectations for the Federal Reserve's interest rate cut in 2024, but now show signs of cooling down. According to the Federal Watch Tool of the Chicago Mercantile Exchange (CME), the likelihood of the Federal Reserve cutting interest rates at the March FOMC meeting dropped to 65% on Wednesday, down from 74% last week.
However, investors may still be overly optimistic, predicting that the Federal Reserve will cut interest rates six times this year, each time by 25 basis points. According to the median forecast of Federal Reserve officials, interest rates will be cut three times this year.
Steve Eisman, the prototype of the movie "Big Short," recently raised doubts about Wall Street's bullish sentiment towards the US stock market. He believes that the Federal Reserve will not significantly lower interest rates.
Eisman pointed out that the lower than expected rate cut by the Federal Reserve in 2024 may become a short-term negative catalyst. He said that the Federal Reserve still fears repeating the mistakes of former Chairman Volcker in the early 1980s, who stopped raising interest rates and caused inflation to spiral out of control again.
The possibility of soft landing is overestimated
Investors' hope for a rate cut in 2024 is largely related to the prospect of a soft landing in the US economy, where the Federal Reserve successfully curbed inflation without causing economic recession and significant unemployment.
But Macquarie pointed out that the current situation shares similarities with the soft landing scenario that occurred in 1995, but there are also many differences.
In 1994, the Federal Reserve raised interest rates by 300 basis points, but in 1995 it slightly lowered rates, avoiding a recession in the US economy. From 1996 to 1999, the US economy grew rapidly while inflation remained at a relatively low level.
"However, we are unwilling to analogize the current situation to 1995; the pre-existing" macro "situation in 2023-2024 looks very different from 1994-1995. The Federal Reserve has tightened monetary policy much more in the recent cycle, leading indicators have been weak for a long time, and cannot enjoy the 'peace dividend', which is very different from the prosperous 1990s," said Macquarie.
In addition, the current market valuation is not as high as in the mid-1990s, and at that time, the leading indicator of US economic growth did not continue to decline as it is now, but only stabilized.
"Therefore, as the Federal Reserve maintains policy interest rates far above neutral levels for a period of time, financial conditions may further tighten in the coming months," said Macquarie.