Analysts at investment bank Wells Fargo issued a view today that it is unlikely the US Federal Reserve will move aggressively on interest rates, although they do see rate cuts this year.
The current “higher for longer” narrative may have been a major stumbling block for the stock market 12 months ago. However, the bank noted that market participants continue to rely on the theme of declining inflation over time and the Fed's sentiment to cut interest rates even though it may not have many opportunities to do so, at least throughout the year.
"It doesn't hurt equity markets that the economy and earnings continue to grow at a moderate pace," Wells Fargo wrote. "A quick glance at the Fed funds futures contract shows the market is now expecting just one to two cuts this year, a far cry from the six to seven cuts as we head into 2024."
For now, Wells Fargo believes the expected rate cuts may be slightly delayed in coming to fruition.
"That doesn't mean a rate cut won't happen altogether, but it does indicate that the Fed may not take aggressive steps when the Federal Open Market Committee meets to determine policy in the coming quarters," they added.
"The rate of inflation has stalled for now, but we see Consumer Price Index inflation declining as the season transitions into summer and into fall, allowing for two reductions this year."
In 2025, the bank has adjusted their estimated total rate cut to just one, which would bring the Fed funds target rate into a range of 4.5% to 4.75% by the end of next year.
