JPMorgan says investors wishing for early and aggressive rate cuts will be disappointed

Published Tue, Jan 23 202410:02 AM ESTUpdated Tue, Jan 23 20242:00 PM EST

Rising geopolitical headwinds and the potential for political turmoil could combine to thwart investors' hopes for the Federal Reserve to enact sharp interest rate cuts this year, according to JPMorgan Chase strategists. Markets have been betting that the Fed likely will start lowering its benchmark short-term borrowing rate by May or even as early as March. But that anticipation, as expressed by futures traders, ignores looming risks that could force the Fed and its global central bank counterparts into a less accommodating posture. JPMorgan's investment team said the calculus could be important for investors as stocks and other asset classes look for direction. "The equity rally of the past couple of months was driven by the emergence of a goldilocks disinflation thesis that would allow central banks to cut rates early and aggressively (ahead of elections)," JPMorgan chief equity strategist Marko Kolanovic and others said in a client note. "We believe the disinflation process is likely to slow or stall in 1H24, in part due to the impact of shipping/supply chain disruptions and upside risk for energy prices." Kolanovic specifically cited the tensions in the Red Sea and the U.S. presidential election as risks to the ongoing disinflationary process that has gotten the Fed closer to its 2% inflation goal. The cautionary tone about policy comes as U.S. stocks break out to new highs . At least some of the enthusiasm has come from hopes that the Fed, European Central Bank and other global policymakers will start cutting rates and continue through the year. To be sure, some of that enthusiasm has waned lately. In recent days, multiple Fed officials have made remarks insisting that they are in no hurry to start cutting rates. Atlanta Fed President Raphael Bostic, a voter this year on the Federal Open Market Committee, said he doesn't envision the first decrease happening until the third quarter, while Governor Christopher Waller said policymakers should move "carefully." Traders have shifted pricing for the first hike to May, though March remains in play with a 43.5% probability of a cut, according to the CME Group's FedWatch gauge. For the full year, traders have gone from a strong chance of six cuts to a coin-flip between five and six. A plurality of JPMorgan clients responding to a survey said they expect the first cut to come in June. The timing is not merely a detail but is important because it could reflect the reason why central banks are cutting, Kolanovic said. "The high March rate cut probabilities presumed a faster disinflation path allowing the Fed to cut for the good reason, which has a positive interpretation for risk markets," he wrote. "Whereas cutting in June or later would mean the inflation and/or growth was stubborn enough to keep us high for long, so if the pace of disinflation slows, this raises the likelihood that the catalyst for rate cutting will eventually be the bad reason, growth risk." Markets will get a better look at the economic picture later this week. The Commerce Department on Thursday releases its initial estimate of fourth quarter GDP growth, followed a day later by its calculation of the personal consumption expenditures price index, a key inflation measure that's watched closely by the Fed. — CNBC's Michael Bloom contributed .