The two interest rate cuts delivered this week by the Bank of Canada (BoC) and the European Central Bank (ECB) likely marked the beginning of a phase of policy easing among major central banks.
On Wednesday, the BoC reduced its policy rate by 25 basis points to 4.75%, citing that "monetary policy no longer needs to be as restrictive" amid "continued evidence" of disinflation.
The ECB followed suit on Thursday with a 25 basis point cut, deeming it "appropriate" to moderate monetary policy restriction after nine months of holding rates steady.
However, the ECB also revised inflation projections upward for this year and the next, tempering excitement over the start of the rate-cut cycle.
The messages from central banks are clear: there is a shift towards a lower level of policy restriction as progress on inflation are proceeding.
After more than three years since the first interest rate hike by the Federal Reserve, there is growing speculation about when and how quickly the U.S. central bank will move towards easing policy.
Current Market Expectations Indicate September As Likely Start
The Federal Reserve will meet next week on June 12, but no changes in interest rates are expected.
Last month, Fed Chair Jerome Powell stressed it would likely be appropriate to maintain the current policy rate at a restrictive level "for longer than thought" to gain greater confidence that inflation is moving sustainably toward the 2% target.
Therefore, the July meeting is also not on investors' radar for the first Fed rate cut.
Current market expectations, as implied by Fed futures, are pricing in 21 basis points of cuts by September 2024, suggesting a more-likely-than-not chance of the first rate cut at the Sept. 18, 2024 meeting.
Market participants currently expect the Fed to deliver two rate cuts by year-end, followed by one additional rate cut by the end of the first quarter of 2025. From now until December 2025, markets expect the Fed to cut interest rates five times.
Diverging Views Among Analysts
While market participants are currently pricing in the aforementioned Fed rate cut cycle, a wide range of views is evident among major investment bank analysts.
Goldman Sachs, in the more "dovish" camp, projects two rate cuts in 2024, starting in September, followed by additional four cuts in 2025, expecting continued progress on disinflation.
In contrast, Bank of America holds one of the most hawkish views across the Street, predicting no rate cut earlier than December 2024.
"We think Powell preaches patience when it comes to cuts and the median member should project a later start to the easing cycle. Inflation has delayed cuts, but the Fed has not changed its view of the fundamentals," BofA economist Michael Gapen wrote in a recent note.
Bank of America continues to expect the first rate cut in December 2024, followed by four 25 basis point cuts in 2025.
