Cut advocates say inflation and jobs may shift Fed outlook
Citi and Brookings analysts argue traders are too focused on rate hikes as oil prices, hiring and inflation may point toward cuts.
By Maya Lindqvist · Senior Technology Correspondent
3 min read
A minority of Wall Street economists is still arguing that the Federal Reserve’s next move could be a rate cut, even as traders price in higher borrowing costs. The split matters because expectations for Fed policy shape bond yields, stock valuations and lending costs across the economy.
CME’s FedWatch tool showed investors assigning a 77% probability that the Fed will raise its benchmark rate by at least a quarter percentage point before year-end. That market view follows renewed inflation worries tied to oil, consumer electronics and a stronger-than-expected reading on growth.
Bank of America analysts said Monday that they expect the Fed to raise rates three times this year, according to Fortune. The bank’s call rests on the view that policymakers will act more forcefully after inflation has run above the Fed’s 2% goal for five years.
Several developments have supported the case for tighter policy, Fortune reported. The U.S.-Israeli war on Iran pushed oil prices higher, while a ceasefire did not bring an equal drop in costs; the artificial-intelligence buildout has contributed to a chip shortage that is lifting prices for consumer electronics.
Fortune also reported that gross domestic product was revised up, the labor market has strengthened, and large fundraising by technology companies has raised questions about how restrictive monetary policy is. Fed Chair Kevin Warsh also used his first news conference in the role to deliver a tougher message on inflation.
Citi economist says the data point to cuts
Andrew Hollenhorst, chief U.S. economist at Citi Research, took the other side in a Friday note. He wrote that economic data and recent developments are more consistent with a need for lower rates than higher ones.
Hollenhorst said the oil market has moved quickly from tight supply toward excess supply, reducing a major inflation risk. He also said the stronger first-quarter GDP revision masked weakness in households, with real consumer spending revised down to a multiyear low.
Citi’s analysis also separated out the effect of the AI investment boom. Hollenhorst said growth would have been 0.5% without spending on computers, electronics and intellectual property, according to Fortune.
Housing is another reason Hollenhorst expects inflation to slow. He forecast that core consumer price index inflation will fall below a 2.5% annual rate by August, compared with 2.9% in May.
On jobs, Hollenhorst said payroll growth is likely to lose strength this summer, beginning with the June employment report. He also pointed to a rising trend in weekly jobless claims, while saying markets may need to see unemployment climb before fully pricing in rate cuts.
Warsh’s tone draws skepticism
Warsh’s recent comments added to the debate. Fortune reported that he said high inflation was a choice and pledged that the Fed would deliver price stability “unambiguously and unanimously.”
Robin Brooks, a senior fellow at the Brookings Institution, said in a Thursday Substack post that Warsh’s hawkish tone was “largely performative” because it was his first appearance as Fed chair. Brooks wrote that Warsh needed to separate himself from the White House.
Brooks also said market expectations for rate hikes are hard to justify because oil prices have returned to levels seen before the Iran war. He predicted the June CPI report, scheduled for July 14, will push investors closer to his view that the Fed is more likely to cut than hike.
This story draws on original reporting from Fortune.