Markets to Rally Despite Potential Lack of Interest Rate Cuts, Says Economist

Investors Remain Bullish Despite Uncertainty on Fed Interest Rate Cuts

In the midst of uncertainty regarding the Federal Reserve's decision on interest rate cuts, chief U.S. economist Steven Blitz at TS Lombard remains bullish on market performance, expressing confidence that markets will continue to rally even if there are no rate cuts this year.

Fed’s Current Stance

Last week, the U.S. central bank maintained the benchmark overnight borrowing rate in a range between 5.25%-5.5%, in line with expectations. The Fed's message of expecting three quarter-percentage point cuts by the end of the year sparked a market rally in the U.S. and overseas, propelling benchmark indexes to new record highs. Despite this, there remains a level of uncertainty around the expected number of interest rate cuts in 2024.

Economic Data and Market Response

As investors await the release of further U.S. economic data and closely monitor clues from Fed officials, traders are currently pricing in a roughly 55% chance of a first Fed rate cut in June, a decrease from the previous estimation of nearly 70%. However, Blitz points out that markets are likely to maintain their upward trajectory even if the Fed decides not to implement any interest rate cuts this year, aligning with U.S. asset manager Vanguard's base-case scenario.

Fed Officials’ Views

Fed Governor Christopher Waller and Atlanta Federal Reserve bank President Raphael Bostic have offered insights into the Fed's stance. Waller emphasized the importance of recent inflation data in determining the Fed's policy rate and suggested a potentially longer duration of the current restrictive stance to ensure sustainable inflation. On the other hand, Bostic revised his expectation from two rate cuts to just one quarter-point cut this year, indicating a shift in the Fed's outlook.

Market Response and Potential Influence

Blitz emphasizes the significance of Fed Governor Christopher Waller's statements, as his views are considered influential and may guide market reactions. He also acknowledges the Fed's cautious approach, noting that the institution is gradually evolving rather than rushing in either direction. Additionally, Blitz warns of the potential challenges associated with rate cuts in the second half of the year, particularly in light of the upcoming presidential election in November, suggesting that such moves could be perceived as politically motivated.

Market Expectations and Timing

Blitz explains that the market anticipates a higher probability of a rate cut in June due to the potential implications of a delay. He points out that while the Fed may be prepared to cut rates if the economy deteriorates post-June, the optics of such a move could become increasingly challenging amidst the political landscape.