Federal Reserve officials have significantly reduced rate cut expectations for the year, scaling back from three to just one—a sharp departure from the three pencilled in at the beginning of the year. At its June meeting, the Federal Open Market Committee (FOMC) held rates steady, keeping borrowing costs at a 23-year high of 5.25% to 5.50%. The decision to keep interest rates unchanged was underpinned by stubborn inflationary pressures, challenging the Fed's progress towards its 2% target.
Investor expectations have also shifted, now anticipating approximately 2 rate cuts this year, down from the six rate cuts at the start of the year (Figure 1). This recent development comes as no surprise to us. Since the end of last year, we have consistently held a contrarian view, predicting that there will be no rate cuts.
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The Fed will not cut rates this year. Here’s why.
As we predicted, interest rate cuts are looking less likely. Here’s why
As we move deeper into 2024, our stance for no rate cuts this year remains unchanged. We believe that interest rates will remain at an elevated level due to sticky inflation, as evidenced by the Fed’s recent upward revisions of the core PCE estimates from 2.6% to 2.8%.
Figure 1: Market expectations for a rate cut have reduced significantly since the start of 2024
Higher interest rates are here to stay
Despite the slightly cooler inflation data for May, with the Consumer Price Index (CPI) easing to 3.3% YoY, below consensus estimates, the broader inflationary trend remains a concern. Both the CPI and the Personal Consumption Expenditures (PCE) continue to record values significantly above the Fed's 2% target (Figure 2).
Furthermore, the core PCE Price Index, which excludes volatile items such as food and energy, has remained virtually unchanged since the start of the year. Although the Committee acknowledges that some economic indicators are moving in the right direction, they stress the need for more substantial progress before they can be confident that inflation is steadily moving toward the 2% target.
Figure 2: Inflation data remains well above the Fed’s 2% target
A significant portion of this inflationary pressure originates from the shelter component, which accounts for approximately 36% of the CPI basket, making it a major driver of inflation. Thus far, the shelter component has been the leading contributor to the CPI, exerting substantial upward pressure even as energy and food prices have largely stabilised since their peaks in 2021-2022 (Figure 3).
Figure 3: Shelter contributes significantly to overall CPI
Due to its methodology, which averages out rent changes across all households and includes both new and ongoing leases, the shelter component of the CPI often does not accurately reflect current housing market prices, resulting in a lag of 6-10 months. This delay stems from the time required to survey homeowners, gather data, and account for lease dynamics, where rent adjustments usually happen during lease renewals or when new tenants arrive. Consequently, the CPI lags behind real-time indices like the Bureau of Labour Statistics New Tenant Rent Index (BLS NTRI) and the Zillow Observed Rent Index (ZORI) which reflect current market conditions more quickly (Figure 4).
Figure 4: The lagging nature of the shelter component in CPI
Recently, housing market indicators have shown an upward trend despite elevated mortgage rates, underscoring a persistent risk of inflationary pressures (Figure 5). Considering the lag in CPI shelter data, this could mean that the rising housing prices will be progressively factored into the overall CPI in the coming months, feeding into broader inflationary trends.
Figure 5: Housing market shows signs of resurgence
Continued strength in the US labour market
The labour market continues to demonstrate resilience, with the economy adding 272,000 new jobs in May, led by a significant increase in healthcare positions (+83,500), a notable rise from April’s 165,000 new jobs (Figure 6). Moreover, the current ratio of job vacancies to unemployed individuals stands at approximately 1.3, indicating a tighter labour market in contrast to pre-pandemic levels (Figure 7).
With this sustained momentum in job creation and stable unemployment rates, the tight labour market in the US is expected to maintain strong wage growth, supporting continued consumer spending.
Figure 6: US job gains continue to grow
Figure 7: A notable disparity between labour supply and job availability still exists
We reiterate our view that there will be no rate cuts this year
The Federal Reserve has adopted a "wait and see" stance, basing future actions on incoming economic data. Although recent economic indicators have shown promising trends that could lead to an easing of monetary policy, the Fed remains cautious, avoiding premature rate cuts. Powell has constantly emphasised that they will not consider cutting rates until they see clear evidence that inflation is on a sustainable path to the 2% target. Given the persistent inflationary pressures and the fairly tight labour market, we reiterate our view that there will be no rate cut this year.
In light of this, investors should consider investing in (1) quality companies and (2) short-duration bonds due to their lower sensitivity to rate fluctuations compared to longer-duration bonds. We also recommend that investors wait for a curve dis-inversion before considering adding duration to their portfolios. High-quality companies, such as those with strong balance sheets and resilient earnings are also likely to fare better in a higher for longer interest rate environment.
Table 1: Recommended products to consider
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Market / Sector |
Recommended Product |
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Short duration bonds |
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Quality companies |
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