How Low Will They Go? Wall Street’s Big Rethink on Interest Rate Cuts

Wall Street is viewing tomorrow’s Consumer Price Index report as a pivotal one that could determine the Fed’s next move on interest rates.Credit…Ted Shaffrey/Associated Press

What next on inflation and rate cuts?

The mood music on rate cuts has changed again. Inflation hasn’t fallen as quickly as expected and the economy is performing strongly. All eyes now are focused on the upcoming Consumer Price Index data for clues on when the Fed might finally start cutting interest rates.

Friday’s blowout jobs numbers have shifted sentiment.Economists on Tuesday are forecasting higher growth but also higher-for-longer inflation and rates. Traders are penciling in fewer than three cuts this year — lower than the Fed’s own projection — with the first coming not before July.

That’s a stark change from the start of the year, when Wall Street figured that a slowing economy and cooling labor market would force the Fed to cut rates as many as six times in 2024.

The uncertainty has hit the markets. After climbing more than 10 percent in the first quarter, the S&P 500 is down roughly 1 percent this quarter. Neel Kashkari, president of the Minneapolis Fed, briefly spooked the markets last week when he suggested that persistently high inflation could mean the central bank wouldn’t cut rates this year.

Wednesday’s inflation report could be pivotal. Economists forecast that overall inflation will tick up on the back of rising energy prices. But they expect that core C.P.I., which strips out the volatile fuel and food price fluctuations, could cool to 3.7 percent, from 3.8 percent.