The Federal Open Market Committee (FOMC) is set to meet this Wednesday, with many economists predicting a 25 basis point (bps) increase in the benchmark interest rate. However, some market observers anticipate multiple rate cuts in the future due to recent banking industry turmoil in the US. While these speculations exist, there are analysts who believe that the Fed’s commitment to holding rates high and not cutting this year is unwavering due to persistent inflation.
Market Reaction to Potential Rate Cut
Experts warn that investors expecting cuts may be in for a rude awakening, as the Fed is committed to maintaining its strict stance on interest rates. Morgan Stanley’s equity strategist, Michael Wilson, has cautioned that a “hawkish” message from Chairman Jerome Powell could trigger a “near-term negative surprise for equities,” causing a sell-off. Wilson also warns that the market has grown increasingly reliant on tech stocks with large valuations, which could exacerbate the impact of any negative news.
Furthermore, Wilson believes that investors who are banking on the Fed cutting rates this year are likely to be frustrated with the outcome. The sentiment that the Federal Reserve will maintain its strict stance on interest rates is not limited to Morgan Stanley’s equity strategist. American economist and macroeconomic expert Claudia Sahm echoed this sentiment, stating that Powell had made it clear that the Fed would not cut rates this year and that people should “believe him.”
Sahm cited three reasons for the Fed’s strict stance on interest rates, including the desire to avoid the mistakes of past Fed chairs, the reverence for former chair Paul Volcker’s approach to monetary policy, and the personal experiences of current Fed officials with high inflation in the 1970s and early 1980s. While some may believe that the Fed can solve inflation problems, others argue that the underlying problems persist and the Fed only has one tool, which is printing money.