Stock Market View: The Fed is in a tough spot

(APMF IN-DOW JONES) There is a small chance that the US Federal Reserve will cut interest rates on Wednesday evening, after new inflation figures were published earlier in the day.

US inflation data is expected to be a major test for markets, especially after last Friday’s strong jobs report. With a still strong labor market and sustained wages and core inflation, the Fed can wait longer before cutting interest rates.

US job growth exceeded all expectations last week, according to ING’s James Knightley. “The strong jobs report has significantly dampened expectations of interest rate cuts this year,” he said.

Market analyst Philippe Marey of Rabobank added in a conversation with ABM Financial News that strong job growth in May is a concern for the Fed. “Wage developments in particular will not lead the Fed toward a rate cut. We believe this May report reduces the chance of a rate cut in September,” Marey said.

This is not without danger. The longer interest rates remain tied, the greater the consequences for the economy.

For example, many analysts noted that the details of the jobs report were not great.

The data showed that the number of people who said they had a job fell by 408,000, the largest decline since the end of 2023. In addition, the size of the working population appears to have shrunk by 250,000, the first decline in four months. Furthermore, the working age population as a share of the population also decreased from 62.7% to 62.5%. Finally, mainly part-time positions were added in May and no full-time positions were added.

Credit card debt has also risen to record levels.

Therefore, the Fed is in a difficult position, because it is looking for an inflation rate of around 2 percent, without the US economy ending up in recession. The longer the central bank waits, the greater that opportunity becomes, according to experts.

In any case, an interest rate cut is not expected before Wednesday. “So all attention is focused on the quarterly update of forecasts on growth, inflation and interest rate policy of individual board members, the so-called ‘dot chart.’ The starting point is that most central bankers expect one or two interest rates,” says chief economist Luc Abin of Van Lanchot Kempen: “The cuts.”

Furthermore, investment director Simon Wiersma of ING said he does not see continued rising US interest rates as a major problem, “as long as volatility in the interest rate market does not increase and the US economy remains strong.”

Source: ABM Financial News

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