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Market dynamics amidst monetary policy shifts: Investors' response to delayed rate cuts


 Investors' response to delayed rate cuts

Since the last meeting of the Federal Reserve, there has been a notable shift in the projections concerning the timing of the first reduction in interest rates within the United States.


Initially, a considerable portion of investors and analysts were anticipating this adjustment to occur as early as March. However, recent developments, including Tuesday's release of inflation data and the assertive statements made by the Fed, have altered this expectation, pushing back the likelihood of commencing the monetary easing cycle to June.


The initial blow to the prevailing market expectations was delivered through comments made by Jerome Powell, the Chair of the Federal Reserve. Following the central bank's decision to maintain the current levels of interest rates, Powell stressed the importance of attaining greater certainty regarding the stabilization of inflation around the targeted 2% mark before entertaining any considerations for rate reductions.



Subsequently, another setback occurred on Tuesday with the publication of inflation Consumer Price Index (CPI) data originating from the United States.


Although the decrease in inflation figures was received positively, it's essential to recognize that economists had been anticipating a slowdown to around 2.9%. However, the current reading fell short of these expectations, potentially influencing the future decisions of the Federal Reserve.


The central bank is wary of repeating past mistakes and is therefore adopting a cautious approach, waiting intently for a clear indication of 2% inflation.


As a result of these developments, investors who had been expecting a more aggressive cycle of rate cuts throughout the year—projecting cuts of 150 basis points by the conclusion of 2024, as indicated by the CME FedWatch tool—found themselves needing to recalibrate their outlooks to align with the present circumstances.



Nevertheless, the delay in implementing rate cuts does not necessarily portend negative prospects for the stock market. Analysts at Bank of America posit an alternative perspective, suggesting that the strategy of adopting a "later and faster" approach to rate reductions, slated to commence in June and continue through subsequent Federal Reserve meetings in September and December, could ultimately prove beneficial for investors.


"The markets clearly disagree with the gradual pace of interest rate cuts after the Fed initiates action. Investors may argue that the Fed must choose between 'sooner and slower' and 'later and faster'," noted experts from Bank of America.


"For now, they're voting for the latter option. We concur that there's a risk our new benchmark will lean in this direction," they added.


16.02.2024



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