Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, stated on Tuesday that the strong real estate market has contributed to the stagnation of inflation, which is why the Federal Reserve may need to maintain interest rates unchanged for a “considerable period of time” or even throughout the year. Morgan Stanley has also revised its prediction for the timing of the first interest rate cut from July to September in their latest report.
The Federal Reserve has maintained the federal benchmark interest rate at a high point of 5.25% to 5.5% for the past 23 years, implementing six consecutive rate freezes, in order to combat stubborn inflation pressures. Federal Reserve Chairman Jerome Powell admitted after the meeting that officials will need more confidence in order to cut rates, which will take longer than initially expected. However, Powell also sent a dovish signal to calm the market, stating that the central bank’s next move is unlikely to be a rate hike.
Neel Kashkari, a hawkish official of the Federal Reserve, stated at the Milken Institute Global Conference on the 7th that the strong real estate market has contributed to the stagnation of inflation to some extent, which means that the Federal Reserve may need to maintain interest rates unchanged for a “considerable period of time” or even throughout the year.
According to Reuters and Bloomberg reports, Kashkari, who does not have voting rights in the FOMC this year, stated at the conference:
However, he also emphasized that a rate hike is not the most likely scenario and the threshold for a rate hike is quite high, but he did not rule out this possibility. He needs to see multiple positive inflation data indicating that the deflation process is on track before he can support a rate cut.
In addition, Kashkari wrote in a recent article that recent inflation data, especially the strong demand in the real estate market, indicates that the Federal Reserve’s policies may not be as tight as officials suspected, which is sufficient to bring the inflation rate back to the Fed’s target of 2%. Instead, it may stabilize at around 3%, which could mean that the Federal Reserve needs to do more to curb inflation.
In response to this, Kashkari also raised his forecast for the long-term neutral interest rate (neither restrictive nor stimulating to the economy) from 2% to 2.5% and hinted that FOMC policymakers may have underestimated the neutral interest rate. Previously, Kashkari predicted two rate cuts at the March meeting, and on Tuesday, he stated that he will predict two rate cuts in the June meeting, which may occur within 2024, or even zero rate cuts, depending on the upcoming inflation data.
When is the highly anticipated rate cut expected? Analysts from Wall Street’s banking giant, Morgan Stanley, believe that the first rate cut in the United States may occur in September. According to Seeking Alpha, analysts from Morgan Stanley postponed their predicted timing of the first rate cut from July to September in order to address sticky inflation. However, the institution still “expects” that the Federal Reserve will implement three rate cuts this year, with each cut being one percentage point.
Ellen Zentner, Chief U.S. Economist at Morgan Stanley, wrote in the report:
Zentner also stated that the risk of a rate cut in September will be lower than in July because the FOMC will receive five additional Consumer Price Index (CPI) reports and four Personal Consumption Expenditures (PCE) reports, which are key inflation data. This will allow the FOMC to see that the inflation rate is indeed returning to the target of 2% before gaining enough confidence to initiate a rate cut. Morgan Stanley also predicts that by the end of 2024, the annualized three-month and six-month core PCE (excluding seasonal food and energy prices) will be close to or below 2%. They also estimate that there will be four rate cuts by mid-2025, each cut being one percentage point.
The U.S. federal funds rate futures market, as indicated by the Chicago Mercantile Exchange’s FedWatch tool, is also betting on the first rate cut in September. The probability of a 25-basis-point rate cut at the September rate decision meeting is approximately 49%, higher than the 35.2% probability of no change and the 14.8% probability of a 50-basis-point cut. The probabilities of keeping rates unchanged in the June and July FOMC meetings are currently 91.1% and 70.4%, respectively.