Big banks push rate cut forecasts further

Stocks (^DJI,^GSPC, ^IXIC) opened mixed on Thursday morning as investors begin to price in the idea of interest rate cuts from the Federal Reserve not happening until after June. The Fed continues to affirm that rate cuts won't come until inflation is much closer to that target date, a point reiterated by Bank of America CEO Brian Moynihan, who spoke to Yahoo Finance Executive Editor Brian Sozzi about potential policy decisions from the Fed.

Due to this current stance, many of the big banks have adjusted their rate cut forecasts to later in the year, including Bank of America, which has pushed back its forecast to December of this year.

Yahoo Finance Reporter Josh Schafer joins The Morning Brief to break down the adjusted forecasts for a rate cut and how this will impact the market .

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Nicholas Jacobino

Video transcript

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BRAD SMITH: Today's top stories, stock futures rising as investors come to terms with the reality that rates could remain higher for longer as inflation remains sticky. Cleveland Fed President Loretta Mester saying on Wednesday that they will cut at some point, but that there's no hurry. Bank of America CEO Brian Moynihan spoke to Yahoo Finance's Executive Editor Brian Sozzi on Wednesday and gave his thoughts on the Fed's battle with inflation. Hear you this.

BRIAN SOZZI: They've got to win the war on inflation, and they are winning, and it's coming down and they've got it on the right trend and that's the great debate of the gold rates a little higher to make sure they've got it on the right trend. And so it's always been sticky, the past would tell you it would take longer period of time, especially when they started late, and they admit that. And therefore, it took a little longer to wring out of the system.

BRAD SMITH: And so we've talked time and time again around where some of the probability has slipped, for now, consecutive meetings, and I think even increasingly among economists, they're looking for some of the rate cuts if they do begin to begin at the very end, perhaps, Q4 of this year at this juncture.

And just looking at some of the CME FedWatch tool, we had seen that shift, especially within that June meeting jump on the back of last week's inflation data that had started to come through two no cuts, and now continuing to signal that it's going to stabilize that a no-cut type of scenario even until we get into September, perhaps. September is now at a 45%, 46% probability of a cut. And again, that is something that we thought we were going to see in June here, and it depends upon the pacing as you bring up all the time too, Seana.

SEANA SMITH: Yeah, certainly. I think pacing is really the key to this here just in terms of the degree of the cuts that we are essentially going to see, and once the Fed does start begin cutting exactly what that pace looks like, thereafter, I think that's a key question here for the markets. But I also want to bring up some of the hawkish commentary that we got from Fed Vice Chair Philip Jefferson.

He was out basically saying that he was making the case that the Fed should be in no rush right now to cut rates, and he said that, I am fully committed to getting inflation back to that 2% target. But if incoming data suggests that inflation is more persistent than it currently expected to be, it will be appropriate to hold in place the current restrictive stance of policy for longer. So I think that points back to really what we're seeing now priced into the market.

You mentioned the fact that more and more investors, more and more traders are now expecting a delay here in terms of that first rate cut and a delay compared to what we had been pricing in what the market had been pricing in just about a week, a week and a half ago. When it comes to where we stand this morning, Fed funds futures are now pricing in only 40 basis points of rate cuts by the end of the year, and Deutsche Bank pointing out that this is the lowest that this has been so far in this cycle. So I think that really illustrates where we are in this cycle, where Wall Street stands right now on rate cuts. And I know Josh has a closer look at maybe some of the revised outlook that we're getting from the bigger banks.

BRAD SMITH: Yeah, I mean, we were talking about by the time we're ready to pull the sandals back out for the summer, that we would finally see some of these cuts start to come through. It sounds like based on some of the CME Fed watch probability, we will be going into sweater season and putting the sandals away. Josh, thanks so much for joining us here. You've got some more this morning. Bank of America, the latest big bank to push back its rate cut forecast further. Let's go out to Josh standing by at the Wi-Fi jumbotron. We're just going to continue calling it that.

JOSH SCHAFER: Well, Brad, I'm out here at the jumbotron. I'm thinking about last week when I told you guys we might be able to take the summer off and come back and talk about Fed rate cuts maybe after the summer because that, as you guys were just laying out, really where market consensus is right now. A lot of banks, as you can see behind me, moving to September or potentially even later. You just mentioned bank of America. They pushed their call out to December. So that would mean one rate cut this year. You could see Goldman Sachs sits at July. Goldman had a one point, expected six cuts, and that's a start in March. But they're now seeing July.

Really the difference in the stories you're seeing behind me is sort of different projections on how the economy is going to grow. So Goldman sees pretty strong growth for the economy. They also see the inflation story remaining intact as the year goes on. That's why they see cuts starting in July. Bank of America sees a little bit of a bumpier path for inflation. Them and Deutsche Bank both see cuts coming in December, and Deutsche Bank also noted that the election is going to matter as we get closer to that in November, it's very unlikely you would see the Fed cut right before the election, right around the election in September, in November. That's going to start to matter.

And then you take a look at Citi's call, Citi's still looking for five cuts this year. Well, if you're going to have five cuts this year, the Fed probably needs to start cutting relatively soon. So that gets us to that June base case. They see inflation falling enough for the Fed to cut but a large part of Citi's call is they still see economic growth slowing. They think the Fed would cut because economic growth is slowing and the Fed is trying to prevent the economy from sinking into a deep recession. So we're still in the soft-landing, hard-landing, no-landing camps here, and then how banks are projecting cuts depends on where they sit within that thesis.