Wall Street strategists remain cautious, stressing that, despite market optimism, immediate rate cuts are unlikely.
The optimism is based on the idea of a US “soft landing” leading to a “new growth era,” with parallels to the 1994-1995 period, according to Macquarie strategists in a note today.
However, Macquarie is hesitant of overstating this parallel, pointing out major variations in macro conditions between 2023-2024 and 1994-1995.
“The Fed has tightened more in the recent cycle, leading indicators are persistently weak, and there is no ‘peace dividend’ to enjoy, along with other major divergences from the ’90s,” according to the analyst.
“The key takeaway is that, notwithstanding the Fed’s successful 1994–1995 soft landing and the subsequent start of a new growth phase driven by continuous fiscal stimulus, readers should be reminded that structural, cyclical, and fluidity factors were at play behind that’soft’ landing. ‘Landing’ was not the same as it was now. Totally different.
The FOMC minutes will be released later today, and experts anticipate that markets will be focused on the detailed discussion of a policy rate cut.
While Fed Chairman Jay Powell hinted a significant discussion of rate cuts in December, other Fed speakers have indicated that a rate drop is not imminent.
According to Richmond Federal Reserve Chairman Thomas Barkin, “additional rate hikes remain a possibility.”
“We do not believe a rate cut is on the horizon.” Strategists believe the Fed must first shift to a neutral policy bias, then to an easing bias, before decreasing policy rates.
“As a result, traders may be disappointed by today’s minutes,” the strategist said.
City economists, including Andrew Hollenhorst, believed that the minutes would help markets aiming to cut rates in the short term in a “pushing back” to FOMC speakers.
He does not believe Fed officials will be “absolutely aggressive.”
“That’s because Fed policymakers are laying the groundwork for tapering later this year (while markets are pricing in) and because Fed officials would prefer to ease monetary conditions rather than tighten quickly.”