Central banks of various countries are performing the "art of cutting interest rates", and the currency market is entering its most active period. Analysts: Don't go against the Federal Reser

Mike Dolan, a well-known media columnist, conducted in-depth research from multiple angles on issues such as when the Federal Reserve will cut interest rates, how it will cut interest rates, and how much it will cut.

More art, less science?

Dolan noted that just two months after Fed policymakers recommended a 75 basis point rate cut this year, some are already thinking about the risks of the economy taking off again from here — which could mean no rate cuts at all.

Really?

Dolan believes these people are simply sketching out scenarios and remain broadly supportive of the December quarter forecast — even if officials remain vague on specific timelines.

Dolan is certain that there is currently no fixed model or mechanical trigger that determines what will happen next—and there is certainly no need to rush into action.

First, Dolan noted, the practice of engaging in “forward guidance”—which has been used over the past 15 years as a tool to guide long-term interest rates downward when policy rates hit zero and no longer fall—has all but disappeared.

Dolan believes that policy rates above 5% are the main lever. Now, data updates or calls from the business environment determine every adjustment from meeting to meeting and how rates will develop.

Atlanta Fed President Raphael Bostic talked about the "art" of timing the first rate cut in a series of interviews last week. For members of the Fed's voting committee this year on the question of when the Fed will cut interest rates, Bostic said it will be as much about professional sensitivity to the evidence of what's coming as it is about any predetermined plan.

"There's going to be some art to this," he told CNBC. "But I do think we're going to come to a conclusion where all the information around inflation is going to tell us that normalization is closer."

Dolan noted that Bostic, to his credit, quickly went on to detail an issue he has been following closely — namely, the worrisome dispersion of inflation, showing that nearly three-thirds of the Federal Reserve’s favored personal consumption expenditures price index basket One-third of the projects still have annual growth rates of more than 5%, which is almost 50% higher than in "normal" times. He worries that welcome declines in the so-called "trimmed mean" core inflation measure - which strips out price outliers - appear to be "leveling off" at a rate that remains above the Fed's 2% target. As a result, Bostic - who is a slightly hawkish member of the Fed's Board of Governors and predicted just two rate cuts in 2024 in December - thinks deflation is "a little bumpy." "We have to be patient," he added. "Let time play out and let people find a new balance and we'll be fine." But it was Bostic who also mentioned that a "backlog of ecstasy" might Risks of reigniting domestic demand and price pressures.

Dolan believes that in order to avoid excessive speculation on the market side, it seems that all circumstances have been considered.

San Francisco Fed President Mary Daly, typically one of the more dovish Fed leaders who has predicted three rate cuts this year and is a member of the Fed's voting committee, issued "undoubtedly good news" about inflation. More enthusiastic remarks. But she is also eager for more information before committing to the first rate cut. “We will need to resist the temptation to act quickly when patience is required,” she said.

Therefore, Dolan believes that there is no fixed strategy manual. The new year's economic data shows that U.S. inflation and employment growth are accelerating, but retail and industrial activity are weakening, and everyone is in a "wait and see" mode.

What Policy Artists Say

Dolan noted that to some extent, the Fed may have - perhaps subtly - actually succeeded in communicating patience, vigilance, flexibility and resolve without having to change policy even a bit since last July.

So much so that this year, the Fed has managed to price markets back to the levels it wanted to see in December - allowing expectations of excessive rate cuts to subside that quickly emerged after that meeting and are now on track for four in 2024. Prices moved less than four 25 basis points during the quarter, two fewer than a month ago. And, the Fed did it without major disruption - raising long-term interest rates to where they were last December, although still 75 basis points below their October peak, and sending stock market indexes to record highs.

On Tuesday, Deutsche Bank said it now views the Fed cycle as "shallow" after cutting interest rates by 100 basis points from June, and blamed the "durability" of inflation on a still-high annualized rate of three-month core consumer price inflation. at 4%.

Saira Malik, chief investment officer at Nuveen, was more pessimistic and said the first rate cut might not even happen until the second half of this year. "The Fed is not ready to act yet."

Dolan believes that in other words, don't fight the Fed.

After research, Dolan pointed out that the situation was similar on the other side of the ocean.

The European Central Bank also divided its hawks and doves, which kept the market guessing - but both parties sent a more patient message and did not trigger the first step mechanically. As a result, this has reshaped the market's rate-cutting trajectory to be similar to that of the Fed - even as the Eurozone is heading into recession and the US economy is growing at over 3%.

Commenting on the ECB's continued persistence, UniCredit economic adviser Erik Nielsen noted that both sides of the ECB Governing Council debate are now saying the same thing, "with only minor nuances." He highlighted two recent speeches he highlighted - one from hawkish governor Isabel Schnabel and the other from the more dovish chief economist Philip Lane - but both Investors seem to agree that demand needs to be curbed further to prevent companies from raising prices.

Nielsen expressed bewilderment at the ECB's stance, noting: "There has been almost no measurable growth in domestic demand in the euro area in the past two years - which, incidentally, has led to the largest gap in per capita income growth between Europe and the United States in decades."

Dolan believes that perhaps all major central banks are simply buying more time. But they may soon need to better differentiate their positions to match domestic economic realities and not just to curb excessive market expectations.

Dolan concluded by noting that this will be a time when currency rates and broader financial markets are likely to become very active.