Wall Street revises rate-cut expectations, anticipates risks starting in March 2025.

• The Fed may not cut interest rates until at least September, and there is a growing possibility of no reductions this year, according to economists and strategists.
• According to Bank of America economists, there is a possibility that the Fed may not cut until March 2025, although they are currently sticking to their December forecast.
• The Fed hopes that inflation data will decrease in the near future, allowing them to ease monetary policy.

Federal Reserve Chair Jerome Powell has made it clear that interest rate reductions are unlikely to happen anytime soon.

Will the central bank make any cuts this year, as Wall Street is now questioning?

According to Powell on Tuesday, there has been "insufficient advancement" in reducing inflation to the Fed's 2% objective, indicating that it may take "more time than anticipated" to achieve enough certainty to begin easing monetary policy.

"Mark Zandi, chief economist at Moody's Analytics, stated that the Federal Reserve is currently focused on inflation numbers after achieving the desired state of the economy. To meet their target of 2%, they need two to three consecutive months of consistent inflation numbers. The earliest they can achieve this is in September, and Zandi does not foresee rate cuts before that time."

The Fed faces a challenging journey to its goal with inflation remaining stable at around 3% for several months.

The probability of a rate cut by the central bank in July is 44%, according to the CME Group's FedWatch gauge, while the probability of a rate cut in September is 71%. The pricing for rate cuts has been highly volatile in recent weeks due to fluctuating Fed rhetoric.

In December, there was a possible shift towards a second-rate cut, but it is still uncertain.

Zandi stated that his base case is two rate cuts, one in September and one in December, but he could envision an additional rate cut in November. He believes that the presidential election could influence Fed officials, despite their claims of not being swayed by politics.

'Real risk' of no cuts until 2025

The possibility of no cuts this year can't be ignored, as the market-implied odds for no cuts stood at around 11% on Wednesday.

Bank of America economists predict that there is a "real possibility" that the Fed won't cut until March 2025 "at the latest," although they still have a December forecast for a single cut this year. Markets at the beginning of 2024 had been pricing in at least six quarter-percentage point reductions.

"According to BofA economist Stephen Juneau, policymakers are unlikely to begin the cutting cycle in June or September due to their discomfort with starting the process. This is because the Fed is data-dependent and the inflation data for the year has exceeded expectations. As a result, the Fed is unlikely to rush to cut rates, especially given the strong activity data."

There is still hope that the central bank will have room to ease monetary policy if inflation data decreases in the upcoming months.

Citi economist Andrew Hollenhorst predicts that the Fed will cut rates several times this year, with inflation data in coming months likely to surprise policymakers positively.

Goldman Sachs has revised its forecast for when policy will ease, moving it from June to July, while maintaining the broader disinflationary narrative, according to Jan Hatzius, the firm's chief economist.

Danger looms

According to Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, if the pause on rate cuts is lifted, the Fed will move ahead. However, Guha also pointed out the vast range of policy options that Powell presented in his remarks on Tuesday.

He stated that the Fed remains data-dependent and vulnerable to being skittled from three to two to one cut if near-term inflation data does not cooperate.

If the Fed is stubborn, it could lead to a policy error, which could harm the labor market and the finance sector, particularly regional banks that are vulnerable to duration risk in fixed income portfolios.

Zandi stated that the Fed should have cut inflation from its mid-2022 highs, but factors related to housing are preventing it from achieving its 2% inflation target.

Zandi stated that the most significant risk to the economy is a mistake in Fed policy, as they have already achieved their mandate on full employment and are close to achieving their mandate on inflation.

""We need to be humble regarding the financial system because stuff happens and there is a risk of breaking something. If I were on the committee, I would strongly argue we should go already," he added."