BoA·Deutsche Bank "Fed to Cut Rates Only in December"

Unyielding Inflation and Strong Labor Market Impact
Fed's Unofficial Spokesperson: "The Issue Is Whether to Cut Interest Rates"

Major Wall Street investment banks are delaying the timing of the U.S. benchmark interest rate cuts. Deutsche Bank and Bank of America (BoA) initially expected the Federal Reserve (Fed) to start cutting rates from June this year, but they have revised their forecasts to only one rate cut in December.

On the 11th (local time), Bloomberg reported that Deutsche Bank and BoA have lowered their expectations for rate cuts.

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This follows the announcement of the U.S. Consumer Price Index (CPI) for March, which recorded 3.5%, exceeding expectations for the third consecutive month. Bloomberg stated that there is growing confidence across Wall Street that the Fed will not change rates until there are signs that inflation is approaching the Fed's target of 2%.

Matthew Luzzetti, Deutsche Bank's Chief Economist team, said, "The recent rise in inflation, strong labor market data, and easing financial conditions have certainly reduced the likelihood of the start of rate cuts."

Previously, Deutsche Bank said the Fed needs to observe whether the core Personal Consumption Expenditures (PCE) price index, a key inflation indicator, weakens in the coming months to gain confidence in easing monetary policy. The core PCE price index rose 0.3% month-over-month in February.

Deutsche Bank expects the core PCE to rise by 0.3% month-over-month in March and April, and if this continues, there will be no basis for cutting rates in July. Bloomberg explained that 0.3% is a sufficiently high figure to raise concerns about inflation.

BoA predicted that the core PCE will increase by 0.25% month-over-month in March and April. Michael Gapen, BoA Economist, said, "With inflation accelerating this year, I think it has become difficult to cut rates before December."

They expect the Fed to start cutting rates in earnest next year. Luzzetti's Chief Economist team anticipates the Fed will cut rates twice in the first half of next year and then pause until 2026. BoA forecasts that the Fed will cut rates four times next year and two more times in 2026.

Nick Timiraos, a reporter for The Wall Street Journal (WSJ), known as the 'unofficial spokesperson for the Fed,' also gave a negative outlook on the possibility of rate cuts on the same day. He said the question is no longer whether rate cuts will happen, but when. He mentioned that the outlook of inflation stabilizing at 3% rather than the Fed's 2% target, along with strong employment, raises doubts about whether the Fed can cut rates by the end of this year.

Timiraos presented two possibilities based on recent inflation data. One is that inflation continues to decline but moves unevenly and 'bumpily.' The Fed's forecast remains valid, but due to greater shocks, the pace of rate cuts this year may slow.

The second outlook is that inflation does not move toward 2% but stays at 3%. If there is no clear evidence of a significant economic slowdown, rate cuts could be completely canceled.

According to the Chicago Mercantile Exchange (CME) FedWatch on the same day, the federal funds (FF) rate futures market sees a 24.6% chance that the Fed will start cutting rates in June. Compared to over 60% last week, market expectations for rate cuts have diminished.