The Federal Reserve probably won’t cut interest rates this year. Why is this good news for the markets?

New York (CNN) Wall Street is eager to see the Federal Reserve finish raising interest rates Turbulent markets cycle and test investor sentiment. despite of A pause in rate hikes is likely, and the cuts may be further afield than some think.

Inventory The market has been holding up this year after a brutal 2022 that was blighted by persistent inflation, Fed rate hikes, Covid shutdowns and geopolitical tensions.

However, investors remained on high alert for signs that the central bank may give up on its rapid clip of rate hikes. issued by the Fed The tenth interest rate hike in a row This is possibleand raised interest rates by a quarter of a point. The central bank also opened the door to a pause, to speed up bets on that The Fed will hold Interest rates stabilized at its next meeting in June and cut rates as soon as in July.

But experts say the Fed probably won’t cut rates soon, at least if the economy stays hot (all bets are off if The United States defaults on its debt). They say a pause in rate hikes could actually be better for stocks than a cut.

The Fed is unlikely to cut interest rates in July

Experts say the Fed will not cut interest rates anytime soon for two main reasons: Inflation has remained steady, and the economy has remained strong.

Although prices have stabilized, inflation remains much higher The Fed’s target of 2%. The Personal Consumption Expenditure Price Index, the Fed’s preferred measure of inflation, increased by 4.2% For the 12 months ending in March.

Meanwhile, US unemployment has reached a level low score. The housing market in the United States cool downbut low inventory and persistent demand are pushing up home prices in some parts of the country.

In other words, there is nothing — at least, not yet — to convince the Fed that it should focus on cutting interest rates.

“Rarely does the Fed cut interest rates without some crisis in between,” said Kara Murphy, chief investment officer at Kestra Investment Management.

last fed discounted rates After an emergency meeting in March 2020, when the onset of the Covid-19 pandemic sent US markets into their first bear market in 11 years and sparked panic that the global economy could slip into a deep recession.

The collapse of Silicon Valley Bank, Signature Bank and First Republic Bank this year raised fears that the banking sector could face more turbulence and tightening credit standards. But the turmoil has been largely contained to regional banks, and financial and economic leaders have done so maintained The banking sector remains stable.

A serious turn for the worse in the banking sector, an implosion in the labor market or a similar downturn in the economy would have to happen for the central bank to cut interest rates in July, says Liz Ann Saunders, chief investment strategist at Charles Schwab.

The Fed will lose any credibility They went If there was no reason, they would go from hiking to slashing.”

Will July cut interest stocks?

Even if the Fed cuts interest rates soon, an immediate upside is not guaranteed.

History shows that stocks tend to perform tepid after a pivot to interest rate cuts compared to a pause: Standard & Poor’s 500 (SPX) Credit Suisse said in a May 9 note that it has historically increased by an average of 16.9% in the 12 months after the last hike of the Fed’s interest rate cycle and fell by 1% in the 12 months after the central bank cut rates for the first time.

Assuming the May 3 rate hike was the last of this cycle, equities should do well over the remainder of the year. However, if the Fed were to taper in July – as futures imply – then the upside would be limited. To a greater extent, analysts said.

Premature cutting rates can hold up Serious consequences for the economy.

Between 1972 and 1974, then-Chairman of the Federal Reserve, Arthur Burns, raised interest rates dramatically. Then cut it off again as the economy shrank.

When inflation subsequently rose, the Fed led by Paul Volcker took aggressive action to raise interest rates to tame it. Effective rates on Fed funds exceeded 22% by their peak in July 1981, and severe central bank tightening helped trigger successive recessions that sent the unemployment rate as high as 10%.

Powell admitted the mistake in a speech he gave last August in Jackson Hole. The Fed has since indicated it will likely not cut interest rates this year and reaffirmed its commitment to lowering inflation.

“I don’t think the Fed will be in a rush to cut rates this time around,” said Marco Perondini, head of US equities at Amundi.

That’s not to say a federal rate cut this year is completely off the cards, says Nicole Webb, senior vice president at Wealth Improvement Group. The Fed will eventually want to cut interest rates back down, but likely won’t want to do so at the historical pace at which they have raised them. She says over the past year.

“They can slowly get us down to 2.5% without the inflation monster rearing its ugly head again,” Webb said. “And I really think it’s possible.”