Fed on hold – but rate cuts are coming sooner

The Federal Reserve will hold interest rates steady this month, but fresh inflation data has increased pressure for a cut sooner than previously expected, says the CEO of one of the world’s largest independent financial advisory organizations

Nigel Green of deVere Group comments: “This CPI report gives the Fed exactly what it’s been looking for: clear evidence that inflation is cooling in line with its target.”

“They’ll stay on hold for now, but they won’t be able to justify it for much longer. A cut this year is now not just likely, it’s looking increasingly necessary.”

The May Consumer Price Index showed that core inflation rose by 0.2% month-on-month, with the year-on-year rate edging up slightly to 2.9% from 2.8%. While not a dramatic drop, the consistency of the 0.2% monthly figure is what carries weight with policymakers.

“This is the second time in three months that we’ve seen the core CPI line up with what the Fed considers acceptable monthly progress,” he explains.

“Markets and the central bank are focused on that monthly trend — and this one points clearly in the right direction.”

Despite the modest rise in the annualized figure, economists and investors alike are honing in on the monthly pace, which is generally viewed as a more accurate gauge of underlying inflation momentum.

“The year-on-year rate can move for all sorts of reasons,” he notes. “What the Fed really wants is reassurance that prices are no longer accelerating dramatically, and this report offers that.”

As a result, rate expectations have shifted sharply.

“Markets are now pricing in a much higher probability of a rate cut in September. That’s a clear change from just a few weeks ago, when some still feared no cut at all this year,” says Nigel Green.

He continues: “The Fed is stuck in a difficult position. It doesn’t want to move too early — but if it waits too long, it risks doing unnecessary damage to the economy.”

The combination of restrictive interest rates, slowing inflation, and increasing political pressure makes for a volatile mix heading into the second half of the year.

The deVere CEO also notes that other central banks are already moving.

“The European Central Bank has already cut. Others are expected to follow. If the Fed falls too far behind, that will have major implications for the dollar, capital flows, and investor confidence.”

For investors, he warns that the pace and timing of the Fed’s actions could significantly impact asset allocation strategies over the next six months.

“If the Fed cuts too late, risk assets will struggle. If it signals a move too early, inflation expectations could reignite. The balancing act is extremely fine; but today’s data gives the Fed a reason to begin preparing the market for action.”

He concludes: “This is the moment investors could look back on as the shift point. The Fed’s next move won’t come today, but the countdown has begun. Cuts are coming and the timing may surprise some.”