Fed rate cuts: Payrolls will weaken, inflation will plunge, and Warsh was 'largely performative'

Key Points:

• Investors currently see a 77% chance that the Federal Reserve will raise interest rates by at least a quarter-point by the end of the year, driven by factors like rising oil prices due to the U.S.-Israeli conflict with Iran and inflationary pressures from a chip shortage amid the AI boom.
• Bank of America analysts predict three rate hikes this year to combat persistent inflation above the Fed's 2% target, while some economists, including Citi's Andrew Hollenhorst, argue that economic data suggests rate cuts may be more appropriate due to weakening consumer spending and a cooling housing market.
• Hollenhorst highlights that despite stronger GDP revisions, underlying growth excluding tech investments is weak, and labor market indicators suggest slowing payroll gains, which could reduce inflationary pressures and lead markets to discount further rate hikes.
• Fed Chair Kevin Warsh took a hawkish stance on inflation during his first press briefing, emphasizing the Fed's commitment to price stability, but some experts like Brookings' Robin Brooks view this as performative and expect upcoming inflation data to shift market expectations toward potential rate cuts.
• Brooks predicts that the June Consumer Price Index report will reveal deflationary trends, particularly due to falling oil prices, which may prompt investors to reconsider the likelihood of Fed hikes and anticipate monetary easing instead.