The Fed probably won't cut rates anytime soon. Why that's good news for markets

RHONDELLA: WELCOME BACK. UNCERTAIN FINANCIAL TIMES FEELING EVEN MORE UNCERTAIN DUE TO THE INTEREST RATES STILL ON THE RISE. THESE AREN’T ALWAYS THE EASIEST TOPICS TO UNDERSTAND, SO JOINING US NOW TO HELP US ALL BREAK IT DOWN IS BANKRATE.COM U.S. ECONOMY REPORTER SARAH FOSTER. GOOD MORNING, THANK YOU FOR JOINING US AGAIN. >> THANKS FOR HAVING ME BACK. JENNIFER: WE SPOKE WITH YOU THREE WEEKS AGO ABOUT THESE RISING INTEREST RATES THAT KEEP GOING UP. ARE YOU SURPRISED THAT THE FEDERAL RESERVE DECIDED TO RAISE RATES BY ANOTHER QUARTER PERCENT THIS LAST WEEK? >> PROBABLY ONE OF THE BIGGEST HEADACHES, BUT ONE OF THE BIGGEST REPORTS FOR FEBRUARY, PRICES ARE STILL ELEVATED AND THE FED UNDERSTANDS THE MAIN OBJECTIVE IS MAINTAINING PRICE STABILITY. WHAT I’VE BEEN TELLING PEOPLE AND WHAT ECONOMISTS HAVE BEEN SAYING IS THAT THIS DECISION TO RAISE INTEREST RATES BY THAT SMALL AMOUNT, THAT IS ABOUT MEETING BOTH OF THESE CONCERNS IN THE MIDDLE. ON THE ONE HAND, YOU DON’T WANT TO CAUSE TOO MUCH PAIN FOR BANKS, BUT YOU ALSO WANT TO MAKE SURE THAT PRICES COME BACK A MUCH MORE SUSTAINABLE LEVEL. >> SINCE WE SPOKE A FEW WEEKS AGO, WE SEE TWO MAJOR BANKS COLLAPSE AND THE RIPPLE EFFECTS OF COUNTLESS OTHERS. WHAT DO YOU MAKE OF WHAT HAS HAPPENED? >> THE BOTTOM LINE THAT I LIKE TO TELL CONSUMERS IS THAT YOU SHOULD NOT BE PANICKING IF YOU PUT YOUR MONEY IN A BANK THAT IS PART OF THE FDIC, AND IF YOUR CASH FALLS WITHIN THE THRESHOLD. BUT THERE ARE SOME CONCERNS HERE ABOUT WHAT IS HAPPENING, SPECIFICALLY AT THESE MIDSIZE COMMUNITY BANKS, THAT THEY COULD WEIGH ON THE ECONOMY JUST A LITTLE BIT, NOT BECAUSE OF THESE FAILURES, BUT BECAUSE THESE REGIONAL-SIZED BANKS, THEY WANT TO MAKE SURE THEY RETAIN ENOUGH CASH ON HAND TO COVER ALL OF THE DEPOSITOR NEEDS. AND SO WE KNOW THAT THESE MIDSIZE BANKS, THEY REALLY MAKE UP A LARGE AMOUNT GOING INTO COMMERCIAL REAL ESTATE, EVEN FOR CONSUMER LENDING. THOSE LENDING STANDARDS, YOU CAN SEE A LITTLE BIT OF THAT ON THE ECONOMY. JENNIFER: TO FOLLOW-UP ON THAT, A POLL THIS PAST WEEK SHOWS THAT ONLY 10% OF AMERICANS HAVE A GREAT DEAL OF CONFIDENCE IN THE NATION’S BANKS AND FINANCIAL INSTITUTIONS RIGHT NOW. MORE THAN HALF THINK THE GOVERNMENT IS NOT DOING ENOUGH TO REGULATE BANKS AND FINANCIAL INSTITUTIONS. WHAT DO YOU THINK NEEDS TO BE DONE TO RESTORE TRUST IN THE INDUSTRY AT THIS POINT? >> WHAT WE DO KNOW HERE IS THAT TRUST IN THE BANKING SYSTEM IS THE BEDROCK FOR IT. WE CAN’T HAVE CONFIDENCE IN BANKS AND WE NEED TO HAVE CONFIDENCE IN BANKS AND ALSO A STRONG ECONOMY. WHAT WE ARE LIKELY GOING TO HEAR DISCUSSIONS ABOUT OVER THE NEXT FEW WEEKS, WE’VE ALREADY SEEN SOME REPRESENTATIVES POINT OUT THE IDEA OF DEPOSITS AT THE FDIC INSURANCE. JANET YELLEN KIND OF WALK THAT BACK A FEW DAYS AGO AND ADDRESSED AT THE CONGRESS. BUT I THINK WHAT YOU’RE GOING TO SEE HERE IS THAT THESE BANKING REGULATORS, THEY WANT TO MAKE SURE THAT ALL DEPOSITORS KNOW THAT THEIR CASH IS SAFE. THIS IS GOING TO BE A MAJOR AREA OF EMPHASIS FOR THEM GOING FORWARD. JENNIFER: SARAH FOSTER, THANK YOU AGAIN FOR YOUR INSIGHT

Wall Street is eager to see the Federal Reserve wind down its aggressive rate-hiking cycle that's battered markets and tested investor morale. Although a pause in interest rate hikes appears likely, cuts may be farther off than some believe.The stock market has stayed resilient this year after a brutal 2022 that was roiled by persistent inflation, the Federal Reserve's interest rate hikes, Covid shutdowns and geopolitical tensions.Still, investors have remained hyper-alert for signs that the central bank could let up its brisk clip of interest rate increases. The Fed issued its tenth consecutive rate hike this May, raising rates by a quarter point. The central bank also opened the door to a pause, accelerating bets that the Fed will hold rates steady at its next meeting in June and cut rates as soon as July.But experts say that the Fed probably won't slash rates so soon, at least if the economy stays hot (all bets are off if the US defaults on its debt). A rate-hike pause could actually be better for stocks than a cut, they say.The Fed is unlikely to cut rates in JulyExperts say that the Fed won't cut rates anytime soon for two key reasons: Inflation remains sticky, and the economy has stayed strong.Although prices are stabilizing, inflation remains well above the Fed's 2% target. The Personal Consumption Expenditures price index, the Fed's preferred inflation gauge, rose 4.2% for the 12 months ended in March.Meanwhile, American unemployment is at a record low. The US housing market is cooling, but low inventory and persistent demand is pushing home prices higher in some parts of the country.In other words, there's nothing — at least, not yet — to convince the Fed it should pivot to lowering rates."The Fed rarely cuts rates without some sort of crisis in between," said Kara Murphy, chief investment officer at Kestra Investment Management.The Fed last slashed rates after an emergency meeting in March 2020, when the onset of the Covid-19 pandemic sent US markets tumbling into the first bear market in 11 years and incited panic that the global economy could tip into a deep recession.The collapses of Silicon Valley Bank, Signature Bank and First Republic Bank this year spurred fears that the banking sector could face more turmoil and credit standards will tighten. But the turmoil has largely been contained to regional banks, and both financial and economic leaders have maintained that the banking sector remains stable.A serious turn for the worse in the banking sector, an implosion in the labor market or a similar nosedive for the economy would have to occur for the central bank to lower rates in July, says Liz Ann Sonders, chief investment strategist at Charles Schwab."The Fed would lose what credibility they have left if for no reason, they went from hiking to cutting," Sonders added. Would a July cut benefit stocks?Even if the Fed were to bring rates down soon, an immediate bull run isn't guaranteed.History shows that stocks tend to perform tepidly following a pivot to rate cuts compared to a pause: The S&P 500 has historically climbed 16.9% on average in the 12 months following the last hike of a Fed rate cycle and fallen 1% in the 12 months after the central bank first cut rates, Credit Suisse said in a May 9 note."Assuming that the May 3 rate increase was the last of this cycle, stocks should perform quite well through the remainder of the year. However, if the Fed were to ease in July — as the futures imply — the upside would be far more limited," the analysts said.Cutting rates prematurely could hold grave consequences for the economy.Between 1972 and 1974, then-Fed Chair Arthur Burns hiked interest rates dramatically. Then, he cut them back down as the economy contracted.When inflation later ripped higher, the Paul Volcker-led Fed took drastic action to push interest rates up to tame it. The effective Fed funds rates topped 22% by its peak in July 1981, and the central bank's aggressive tightening helped trigger back-to-back recessions that drove the unemployment rate as high as 10%.Powell acknowledged the missteps in a speech last August at Jackson Hole. The Fed has since signaled that it likely won't lower rates this year and reaffirmed its commitment to tamping down inflation."I don't think that the Fed is going to be in any hurry to cut rates this time," said Marco Pirondini, US head of equities at Amundi.that's not to say that a Fed rate cut this year is completely out of the cards, says Nicole Webb, senior vice president at Wealth Enhancement Group. The Fed eventually will want to lower rates back down, but it likely won't want to do it at the historical pace it's raised them over the past year, she says."They can slowly pace us down to 2.5% without the inflation monster rearing its ugly head again," Webb said. "And I do actually believe it's possible."

The stock market has stayed resilient this year after a brutal 2022 that was roiled by persistent inflation, the Federal Reserve's interest rate hikes, Covid shutdowns and geopolitical tensions.

Still, investors have remained hyper-alert for signs that the central bank could let up its brisk clip of interest rate increases. The Fed issued its tenth consecutive rate hike this May, raising rates by a quarter point. The central bank also opened the door to a pause, accelerating bets that the Fed will hold rates steady at its next meeting in June and cut rates as soon as July.

But experts say that the Fed probably won't slash rates so soon, at least if the economy stays hot (all bets are off if the US defaults on its debt). A rate-hike pause could actually be better for stocks than a cut, they say.

The Fed is unlikely to cut rates in July

Experts say that the Fed won't cut rates anytime soon for two key reasons: Inflation remains sticky, and the economy has stayed strong.

Although prices are stabilizing, inflation remains well above the Fed's 2% target. The Personal Consumption Expenditures price index, the Fed's preferred inflation gauge, rose 4.2% for the 12 months ended in March.

Meanwhile, American unemployment is at a record low. The US housing market is cooling, but low inventory and persistent demand is pushing home prices higher in some parts of the country.

In other words, there's nothing — at least, not yet — to convince the Fed it should pivot to lowering rates.

"The Fed rarely cuts rates without some sort of crisis in between," said Kara Murphy, chief investment officer at Kestra Investment Management.

The Fed last slashed rates after an emergency meeting in March 2020, when the onset of the Covid-19 pandemic sent US markets tumbling into the first bear market in 11 years and incited panic that the global economy could tip into a deep recession.

The collapses of Silicon Valley Bank, Signature Bank and First Republic Bank this year spurred fears that the banking sector could face more turmoil and credit standards will tighten. But the turmoil has largely been contained to regional banks, and both financial and economic leaders have maintained that the banking sector remains stable.

A serious turn for the worse in the banking sector, an implosion in the labor market or a similar nosedive for the economy would have to occur for the central bank to lower rates in July, says Liz Ann Sonders, chief investment strategist at Charles Schwab.

"The Fed would lose what credibility they have left if for no reason, they went from hiking to cutting," Sonders added.

Would a July cut benefit stocks?

Even if the Fed were to bring rates down soon, an immediate bull run isn't guaranteed.

History shows that stocks tend to perform tepidly following a pivot to rate cuts compared to a pause: The S&P 500 has historically climbed 16.9% on average in the 12 months following the last hike of a Fed rate cycle and fallen 1% in the 12 months after the central bank first cut rates, Credit Suisse said in a May 9 note.

"Assuming that the May 3 rate increase was the last of this cycle, stocks should perform quite well through the remainder of the year. However, if the Fed were to ease in July — as the futures imply — the upside would be far more limited," the analysts said.

Cutting rates prematurely could hold grave consequences for the economy.

Between 1972 and 1974, then-Fed Chair Arthur Burns hiked interest rates dramatically. Then, he cut them back down as the economy contracted.

When inflation later ripped higher, the Paul Volcker-led Fed took drastic action to push interest rates up to tame it. The effective Fed funds rates topped 22% by its peak in July 1981, and the central bank's aggressive tightening helped trigger back-to-back recessions that drove the unemployment rate as high as 10%.

Powell acknowledged the missteps in a speech last August at Jackson Hole. The Fed has since signaled that it likely won't lower rates this year and reaffirmed its commitment to tamping down inflation.

"I don't think that the Fed is going to be in any hurry to cut rates this time," said Marco Pirondini, US head of equities at Amundi.

that's not to say that a Fed rate cut this year is completely out of the cards, says Nicole Webb, senior vice president at Wealth Enhancement Group. The Fed eventually will want to lower rates back down, but it likely won't want to do it at the historical pace it's raised them over the past year, she says.

"They can slowly pace us down to 2.5% without the inflation monster rearing its ugly head again," Webb said. "And I do actually believe it's possible."

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