Regarding Fed's Future Rate Decisions, The 'Make-or-Break Moment' Could Be In May
1min read After the Federal Reserve announced its latest interest rate decision on Wednesday, Jim Bianco, a Wall Street veteran with 40 years of experience and President of Bianco Research shared his insights on the Fed's potential future interest rate path.
Bianco emphasized that, as it stands, the Federal Reserve's most critical meeting will be the next one, scheduled for May 7. By May 7, if the Fed still cannot find a reason to cut rates, they will not cut rates for the rest of the year (barring some unforeseen circumstances).
Bianco explained that the current slowdown in U.S. economic growth is outpacing the rise in inflation, and the market is already anticipating the Fed to take action to address the economic slowdown.
This means that if the Fed does not act at the May meeting, they will need to provide more justification for this decision. In Bianco's view, the recent FOMC meeting was merely a dress rehearsal for the May meeting.
Inflation Remains the Biggest Hurdle to Fed Rate Cuts
When asked how the Fed would respond if low growth coincides with a resurgence of inflation, Bianco referenced September last year, when the Fed initiated a rate-cutting cycle with a 50-basis-point reduction.
Bianco noted that at that time, the Fed's significant 50-basis-point rate cut was seen as not taking inflation seriously enough, leading to a sharp decline in the bond market.
Similarly, if the Fed insists on cutting rates to address an economic slowdown while inflation remains sticky, it could be interpreted as neglecting inflation, potentially leading to the same market reaction.
He warned that the U.S. core inflation rate has remained above 3% for 46 consecutive months, far exceeding the Fed's 2% target, indicating that inflation risks remain significant.
Analysts Expect Inflation to Bottom Out in May, Potentially Opening a Window for Rate Cuts
Some analysts previously suggested that if the economic downturn is solely due to natural pressures, the Fed could quickly cut rates to resolve the issue, which would not be a major concern. However, if supply-side inflation challenges are also present, the Fed may be forced to face a growth slowdown without being able to act, or even face pressure to raise rates, similar to 2022. This is what the market fears.
They believe that the timing and path of future rate cuts will depend on two factors: the natural economic trajectory and the speed and intensity of tariff policies.
Given the current uncertainties surrounding tariffs, CICC estimates that inflation will continue to decline until May (with the overall CPI bottoming at 2.6%). The reflexive impact of the rate cuts that began in mid-January has yet to materialize, thus providing a window for rate cuts during this period.
