Tonight, it seems “certain” that the Federal Reserve will not cut interest rates.

At 14:00 p.m. EST on Thursday, May 1 (2:00 a.m. on Thursday, May 2, Beijing time), the Federal Reserve will announce the interest rate decision. Federal Reserve Chairman Powell will hold a monetary policy press conference half an hour after the interest rate decision is announced.

The market generally expects that until there is more confidence in controlling inflation, the Federal Reserve will continue to maintain its current restrictive policy stance. The current FOMC meeting will continue to maintain interest rates at a high level of more than 20 years, that is, maintain the federal funds target range of 5.25-5.50%.

Due to stubborn inflation, interest rate cuts for 2024 have been postponed over and over again since this year. Traders currently expect the Federal Reserve to cut interest rates only once this year, far lower than the number of times they expected about 6 times at the beginning of the year.

In his last speech, Powell said that policymakers may keep interest rates high for longer than previously anticipated, and explained that there is currently no further progress in reducing inflation, and the labor market continues to be strong.

or “stand still” for the third time in a row

As of press release, the CME FedWatch tool shows that the futures market believes that the probability that the Federal Reserve will keep interest rates unchanged in May is as high as 97%.

Since this year, the Federal Reserve has announced twice in a row that interest rates will remain unchanged at the January and March FOMC meetings.

Also, according to Wall Street news, 10 major Wall Street banks, including Goldman Sachs, Citi, Morgan Stanley, and J.P. Morgan Chase Nomura, all predict that the Federal Reserve will keep interest rates unchanged in May.

The UBS analysis team also pointed out in the research report that the Federal Reserve's monetary policy position will not change this time; the main focus will be the remarks made by Federal Reserve Chairman Powell at the press conference after the meeting.

Will there still be interest rate cuts during the year?

What is the next path to cutting interest rates?

According to the CME FedWatch tool, investors have postponed their interest rate cut expectations until November. The probability of continuing the same decision in June is 88.5%, compared to 55.2% on the eve of the last FOMC meeting in March.

Bank of America Merrill Lynch analyst Michael Gapen's team pointed out in the report that since recent inflation data did not give the Fed confidence that it could begin an easing cycle, it is absolutely impossible to cut interest rates in June, and the expectation of the first rate cut was postponed until December, and the terminal interest rate forecast for 2026 was raised to 3.50-3.75%.

Bank of America Merrill Lynch believes that although confidence in the rate of cooling inflation cools down, the Federal Reserve will not give up its basic expectations of falling inflation.

HSBC is more optimistic. Its analyst Ryan Wang said in the report that the Federal Reserve is expected to cut interest rates by 25 basis points each quarter starting in June until the third quarter of 2025.

Wang pointed out that the PCE price index is a key factor in cutting interest rates, and the Federal Reserve needs to see core PCE prices fall to around 2.5% before starting to cut interest rates. According to the latest data, the year-on-year growth rate of core PCE prices rose slightly to 2.82% in March.

Citi believes that the Federal Reserve may start cutting interest rates this summer. The possibility of cutting interest rates in July has increased compared to June, and points out that the expectation that interest rate cuts will completely fade out this year is too aggressive.

On the other side, the more pessimistic view is that not only will the Federal Reserve not cut interest rates during the year, but it may also raise interest rates again.

LaVorgna, former chief economist at the National Economic Council, said:

“As it stands, this means that the Fed will not cut interest rates. If [inflation] doesn't fall, the Fed will either have to raise interest rates at some point or keep interest rates higher for a longer period of time. Will this end up making us a hard landing?”

Bank of America Merrill Lynch pointed out that there are two types of catalysts for the Fed to move to interest rate hikes in the future: one is the acceleration of core and overall inflation, and the other is an increase in inflation expectations.

Slowing down the introduction of QT?

Analysts are currently still divided on when to end quantitative austerity, but it is generally expected that the gradual slowdown of QT will be near.

At the March FOMC meeting, Powell said that the committee generally believes that it is appropriate to slow down the pace of balance sheet reduction “soon”, and Wall Street interpreted this statement as sending a signal that the Federal Reserve will soon implement QT mitigation.

HSBC expects that the Federal Reserve will announce a reduction in the pace of QT at this meeting, and that the scale of downsizing, including US Treasury bonds and institutional mortgage-backed securities (MBS), will be reduced from about $80 billion per month to around $50 billion per month. Conversely, if the Federal Reserve does not announce a slowdown in QT as scheduled, Powell may also give new wording on the topic and may suggest that a relevant decision will be introduced in June or July.

UBS also believes that plans to slow down QT will be announced in June and officially implemented in July.

However, Bank of America Merrill Lynch anticipates that considering that the overnight reverse repurchase (ON RRP) balance is still sticky, which means that liquidity in the market is still exhausted, the Federal Reserve may continue to maintain the current pace of contraction. However, Bank of America Merrill Lynch also pointed out that the Federal Reserve may announce a reduction in the maximum monthly limit for treasury bills due and redemption, from 60 billion US dollars to 30 billion US dollars, which can also play a role in slowing down QT.

Editor/Jeffrey