The recent Federal Reserve monetary policy decision, along with a lower-than-expected May consumer inflation numbers, sent the S&P 500 and Nasdaq Composite to all-time highs. The S&P 500 added 0.8% and the Nasdaq Composite advanced 1.5%, both notching new record highs, while the Dow lost 35 points. Markets are discounting the fact that a rate cut is on the horizon.

According to the Summary of Economic Projections, FOMC member forecasts for this year averaged a single 25 basis point rate cut, which is less than the two rate cuts now priced in by the markets. This aggressive revision came despite a softer-than-expected inflation report earlier in the day, as headline inflation unexpectedly dropped and the core gauge fell more than predicted.

However, inflation may make a rebound and make things difficult for the Fed. At the same time, robust growth in corporate earnings is keeping the markets ride on bullish sentiments.

Here are some expert views on the way forward for the markets:

Subho Moulik, Founder & CEO, Appreciate

The 3.3% CPI reading in May was the kind of positive reading that the Federal Reserve was pinning its hope on after a disappointing first quarter this year. The reading goes on to add more grist to Chair Jerome Powell’s belief that inflation is moving gradually towards the 2% target, even if it might be doing so on a somewhat bumpy path.

A series of cooler-than-anticipated inflation readings coupled with moderating labour market conditions in the coming months will go on to bolster the Federal Reserve’s confidence that its soft landing goal is truly attainable, and within sight.

As far as the economic projections are concerned, I would be cautious about putting too much weight on the expectation of just one rate cut this year. Chair Jerome Powell has pointed out that these projections come with “a slight element of conservatism” and are data-dependent, which is another way of saying that there could be more than one rate cut in the year, provided we have a string of positive, confidence-inducing inflation results.

Colin Shah, MD, Kama Jewelry

The decision by the US Fed to keep the policy rate intact for the seventh consecutive time comes as per the industry expectations. Although the inflation has cooled down, it has still not come under the Fed’s expected range, thereby deferring the possibility of three rate cuts, which we could have possibly seen during this calender year.

As per the forecast by Fed, it has hinted that it may start slashing rates from next year onwards wherein a rate cut of 100bps is in focus. However, we will have to wait and watch how the inflation numbers play out, which will further decide the possibility of rate cuts next year.

Deepak Agrawal, CIO-Debt, Kotak Mahindra AMC

FOMC seems to be guided by strong job gains and inflation being at elevated levels along with modest progress towards the 2% inflation forecast, delivered a hawkish outcome despite lower CPI number for the month of May 2024. Market was expecting dot plots to indicate 50 bps rate cut in CY 2024 and retain CY 2025 rate cuts at 75 bps. However, FOMC dot plots now indicate 25 bps rate cut in 2024 and 100 bps in CY 2025. Neutral Fed Fund Rate has also been increased from 2.6% to 2.8%. We think Fed will continue to be data dependent and we could see 25-50 bps cut in CY 2024.

Dhawal Ghanshyam Dhanani, Fund Manager, SAMCO Mutual Fund

The US Fed decided to hold benchmark rate in 5.25-5.50% target range (for a 6th consecutive meeting), unlike European Central Bank which became the fourth major central bank to cut its policy rate after Switzerland, Sweden and Canada last week. Up until now, market priced for 1-2 rate cuts by December however, the Fed recommended 2-3 cuts back in March meet via their ‘dot plot’.

To the surprise of many, Fed indicated a big hawkish stance by suggesting just one rate cut coming this year vs. 3 in March — cementing higher for longer rates for the markets. Powell categorically stated that pre-pandemic ultra low rate world may not return. Markets being myopic may rejoice cooler than expected CPI data along with clarity of dot plot this year.

Dr. Vikas V. Gupta, CEO & Chief Investment Strategist, OmniScience Capital

The Fed is closely monitoring the unemployment rate and the domestic demand index in the GDP data. They would like to see a significant drop in GDP. Although GDP growth has slowed to 1.3%, the domestic demand index, excluding government spending and corporate investments, remains robust at 2.8%, which is uncomfortably high for the Fed. Additionally, the unemployment rate is at 4%, still lower than the Fed’s comfort level.

The economy seems quite robust, and unemployment rates are unlikely to increase significantly. However, as wage increases moderate, inflation should start easing faster, potentially forcing the Fed to cut rates sooner than their dot plot projections suggest.”

Charlie Ripley, Senior Investment Strategist for Allianz Investment Management.

Despite further progress on the inflation front, the tone from today’s FOMC statement was viewed rather hawkish over the near term from market participants as rate cut expectations from the Fed members have shifted to show only one rate cut for this year.

It is fairly clear the conviction around the path of inflation amongst the Fed is relatively low, and even though many market participants believe the Fed should begin cutting rates sooner, the Fed has opted to maintain a restrictive stance for most of this year. At the end of the day, a calendar is just a mental reference point and the reality is rate cuts are likely closer than they appear.

Bill Adams, Chief Economist for Comerica Bank

Importantly, the balance of opinion in the Dot Plot doesn’t necessarily reflect how the FOMC will vote between now and the end of the year. All of the regional Fed presidents have a dot in the dot plot, but only a handful of them vote in FOMC decisions. Most of the votes are cast by the Federal Reserve Board governors, who tend to be more receptive to the idea of cutting rates. That suggests a majority of voting FOMC members probably think two rate cuts are most likely appropriate before year-end.

In short, the Fed made their decision-making process fairly clear coming into recent meeting, and their policymakers are reacting to incoming data in a manner that is consistent with that process. If inflation continues to moderate, as has been the trend over the last year and a half, the Fed will start to cut interest rates in the second half of 2024.

Quincy Krosby, Chief Global Strategist for LPL Financial

The Fed statement, while acknowledging that inflation is moving towards the Fed’s 2% target nonetheless was muted in terms of suggesting the Fed is similarly moving closer toward easing monetary policy.

This is most likely a function of not wanting to ease financial conditions unnecessarily as the data dependent Fed requires a series of cooler inflation reports before initiating a rate easing cycle.

Jeffrey Roach, Chief Economist for LPL Financial

There’s no denying the progress toward the Fed’s 2% target but the real debate is timeframe. Barring any exogenous shocks, the economy will slowly converge to the Fed’s target. Since parts of the economy are less sensitive to interest rates in this business cycle, the Fed is constrained to keep rates higher for longer. Expect to hear more about this at the Jackson Hole Symposium in August.