"US Interest Rate Cut from Q3"...Global IBs Uniformly Postpone Forecasts

IB 10 Institutions "US Interest Rate Cuts Starting After Q3"
8 IBs Delay the Start of Rate Cuts
Number of Rate Cuts This Year Reduced from 2-5 to 1-4

[Image source=AFP Yonhap News]

Ten global investment banks (IBs) unanimously agreed that the U.S. Federal Reserve will begin cutting its benchmark interest rate starting from the third quarter of this year. The timing of the rate cut, initially expected around June to July, was pushed back after the U.S. Federal Reserve (Fed) indicated on the 1st that the high interest rate policy would be prolonged.

On the 8th, the Bank of Korea's New York office reported in its "Recent U.S. Economic Situation and Assessment" that, based on its own survey conducted on the 3rd immediately after the Federal Open Market Committee (FOMC) meeting, ten major IBs agreed that the Fed's rate cuts would begin in the third quarter. Among the ten IBs, eight delayed their expected start time by 1 to 6 months compared to their previous forecasts, while two maintained their original forecast of July.

Earlier, at the FOMC regular meeting held from April 30 to May 1 (local time), the U.S. Fed unanimously decided to keep the policy rate unchanged at 5.25-5.50%. Fed Chair Jerome Powell said at the subsequent press conference, "It will take longer than expected to gain confidence that inflation is on a sustainable path toward 2%," and added, "While we expect inflation to decline this year, the data has weakened that confidence." This effectively signaled a delay in the timing of rate cuts and increased the likelihood of fewer cuts.

Initially, IBs expected the U.S. rate cuts to begin around June to July, but in this month's forecast, they pushed the timing back to between July and December. The Bank of Korea stated, "Although concerns about further rate hikes have diminished, Chair Powell mentioned that more time is needed to gain confidence for rate cuts," adding, "Considering this, uncertainty about the timing of policy shifts is expected to persist."

Among the ten IBs, eight delayed their forecast for the start of rate cuts this year. Barclays, Wells Fargo, and Toronto-Dominion (TD) postponed their June forecasts to September. Citi, Goldman Sachs, and Morgan Stanley adjusted their June forecasts to July. Bank of America (BoA) and Deutsche Bank significantly pushed their June forecasts to December. JP Morgan and Nomura maintained their original forecast of July.

The forecast for the number of rate cuts was also reduced by seven out of the ten IBs. Barclays and BoA revised their expected cuts from three to one, while Goldman Sachs adjusted from three to two. Deutsche Bank changed from four cuts to one. Wells Fargo and TD revised from four to two cuts. Citi reduced its forecast from five to four cuts.

Previously, on the 8th of last month, the ten IBs forecasted that U.S. rate cuts would begin in June to July. JP Morgan and Nomura expected July, while the other eight, including Barclays, BoA, and Citi, expected June.

The forecast for the number of rate cuts was also reduced from 2-5 times to 1-4 times. Last month, Barclays, BoA, Goldman Sachs, Morgan Stanley, and JP Morgan expected three cuts this year, while Wells Fargo, Deutsche Bank, and TD expected four. Citi was the only one forecasting five cuts, and Nomura expected two cuts.

As the timing of the U.S. benchmark rate cuts is expected to be delayed, market observers believe that South Korea's rate cuts will inevitably be postponed as well. On the 2nd (local time) in Tbilisi, Georgia, Bank of Korea Governor Lee Chang-yong said, "The assumptions we had during the April Monetary Policy Committee meeting have all changed within a month," adding, "We need to reassess whether the rate cut timing we thought of in April will be pushed back further or if it could still come sooner." This suggested that the expectation of delayed Fed rate cuts is growing, implying that South Korea's rate cut timing may also be pushed back. The Bank of Korea is scheduled to hold its Monetary Policy Committee meeting on the 23rd.