The latest research from the Federal Reserve: interest rate cuts may not occur until 2026!

The latest Federal Reserve document shows that interest rate cuts may not come until 2026.

Last week, two economists at the Kansas City Fed, Johannes Matschke and Sai Sattiraju, said in a latest paper that to get inflation down to 2%, the Fed would have to keep interest rates higher (above 5%) and longer than the market expects, perhaps until 2026.

Economists point out that even though the Fed tightened policy at the fastest pace since the 1980s last year, the surge in inflation has pushed the equilibrium level of interest rates in the U.S. economy up at a faster pace. Because of this, the policy rate level will not enter a restrictive range until the first quarter of 2023.

The latest data shows that the annualized growth rate of US GDP in the first quarter was 2%. Economists believe that given that the US economic growth rate is still so strong, the Federal Reserve may need to keep interest rates at or above the current level for more than three years in order to return the core PCE index, the inflation indicator favored by the Federal Reserve, to the Federal Reserve's 2% target level.

Torsten Slok, chief economist at Apollo Global Management, pointed out that this may complicate the rise of U.S. stocks in the first half of the year, causing the S&P 500 to give up some of its nearly 16% gain this year as investors gradually digest the view that "interest rates will not fall soon."

The Chicago Mercantile Exchange's FedWatch tool shows that traders expect the Federal Reserve to raise interest rates at least once this year.

The Federal Reserve has also made a similar statement. On June 28, at the central bank forum held by the European Central Bank, Federal Reserve Chairman Powell said that the Federal Reserve may raise interest rates again as early as next month, and did not rule out the possibility of raising interest rates at two consecutive meetings. He reiterated that the forecasts of most Federal Reserve policymakers show that they expect to raise interest rates at least twice this year.

Powell also said at a hearing last week that he does not expect inflation to return to the Fed's 2% target until 2025, which means the Fed will not cut interest rates for some time after that. But trading in the federal funds futures market shows that traders once again refused to believe him and instead expected the Fed to cut interest rates in 2024.