The Fed may not cut interest rates this summer.

Economic growth is steady if not rising, while inflation remains a constant. Meanwhile, central banks remain reluctant to cut interest rates, and few even think they might be willing to raise rates if inflation worsens.

A slew of better-than-expected economic data, along with fresh commentary from policymakers, are suggesting that easing is unlikely in the near term. Traders this week repriced futures contracts on the assumption that interest rates will not be cut in September, and expect only one rate cut later this year.

The market reaction has been less than pleasant. Stocks suffered their worst day of 2024 on May 22, and the Dow Jones Industrial Average snapped a five-week winning streak heading into the Memorial Day holiday.

Over the past week or so, the message has been pretty clear: Economic growth is at least steady, if not accelerating, while inflation is looming as consumers and policymakers remain wary of high living costs.

For example, weekly jobless claims have slowed after hitting their highest level since late August 2023 a few weeks ago, suggesting the pace of layoffs is slowing. Then a survey released this week also showed stronger-than-expected expansion in both the services and manufacturing sectors, and purchasing managers reported stronger inflation.

No reason to cut interest rates

The figures came a day after the release of minutes from the Federal Open Market Committee (FOMC)'s most recent meeting, which showed central banks still lack confidence in cutting interest rates. Fed Governor Christopher Waller said earlier this week that he would need data showing inflation had been falling for several months before deciding to cut rates.

Taken together, there is little reason for the Fed to ease policy at this point. “The recent Fed speech and the May FOMC minutes make it clear that given the fact that inflation surprised this year and economic activity remains solid, the likelihood of a rate hike at this point is low,” said Bank of America (BofA) economist Michael Gapen.

“There seems to be a strong consensus that policy is within a narrow range and therefore no further rate hikes are needed,” the expert added. BofA believes the Fed could wait until December to start cutting rates.

Some participants at the most recent FOMC meeting even wondered whether “higher interest rates would have a smaller impact than in the past,” the minutes said.

Data to be released soon

Economists like Mr. Gapen and others on Wall Street will be closely watching the data coming out next week, when the Commerce Department releases its monthly report on personal income and spending, which will include the Personal Consumption Expenditures Price Index (PCE), the Fed’s top inflation measure.

The unofficial consensus is for a monthly increase of 0.2% to 0.3%, but even that relatively muted increase may not give the Fed much confidence to cut. At that pace, annual inflation would likely be just 3%, or still well above the Fed’s 2% target.

“If our forecast is correct, year-over-year inflation will fall only a few basis points to 2.75%, with little sign of inflation retreating to the Fed’s target,” Gapen said.

If at the beginning of this year, traders predicted that the Fed would have at least six interest rate cuts, then through the re-pricing in the session on May 24, they showed their expectation that there is a 60% chance that the US institution will only adjust interest rates once this year.

The Fed's benchmark federal funds rate has been at 5.25-5.50% since last July.

“We continue to view rate cuts as optional, which reduces the urgency,” said Goldman Sachs economist David Mericle. “While the Fed leadership appears to share our view of the inflation outlook and may be open to cutting, some FOMC members appear more concerned about inflation and are reluctant.”