Per MarketWatch: Investors encouraged to consider the ‘unthinkable’: no Fed rate cuts in 2024.
A prominent Wall Street bank is exploring a scenario it deems "extreme," in which no Group of 10 central bank lowers interest rates this year due to persistent inflation, robust economic growth, or unforeseen shocks that could elevate price pressures. In a note, Athanasios Vamvakidis, an FX strategist at Bank of America, highlighted the implications of a seemingly "unrealistic" situation where major central banks refrain from rate cuts. Presently, markets anticipate multiple interest-rate cuts from central banks, but B. of A. foresees fewer cuts due to inflation resilience, strong economies, and tight labor markets. Comments from policymakers, such as ECB members Robert Holzmann and François Villeroy de Galhau, and Fed Gov. Christopher Waller, have tempered rate-cut expectations, contributing to a selloff in the U.S. bond market.
Vamvakidis emphasized the significance of considering the market implications of a scenario where G-10 central banks abstain from rate cuts, noting that such a situation, although viewed as unrealistic by consensus, could have a positive impact on the dollar, euro, and Swiss franc against currencies like the Norwegian krone, Australian dollar, and Japanese yen.
Heightening concerns about lingering inflation are two current factors. First, developments in the Middle East, with U.S.-led strikes affecting oil shipments through the Red Sea. Second, unexpectedly robust U.S. wage growth for December, described as "the one remaining ember that could reignite inflation." Treasury yields experienced notable jumps, reflecting market expectations for multiple rate cuts, even as U.S. stocks closed lower. The envisioned U.S. interest-rate cuts are seen as preventive measures to maintain accommodative conditions amid falling inflation.
