Fed Rate Cuts and the Potential Slowdown: How US Investors React to Economic Uncertainty

Bank of America strategists are concerned that a Federal Reserve interest rate cut could signal trouble for the economy. Despite a strong economy and company earnings, US equities have been rising since October in the face of higher interest rates. Investors hope that the central bank will ease policy before any significant harm is done to economic growth.

Michael Hartnett of Bank of America believes that a Fed rate cut could be the first sign of trouble, with the likelihood of a hard landing increasing if the market becomes more certain of lower rates in the latter part of 2024. Traders have been postponing expectations of a Fed cut but now anticipate the first one in September. If traders increase their bets on a rate cut and cyclical stocks fail to rise, bonds will outperform as concerns about a significant slowdown grow.

Investors continue to put money into stocks, with US equity funds receiving $4.6 billion in inflows during the seventh week. Investment-grade bonds also saw inflows of $5.8 billion, marking the 32nd consecutive week of positive flows. However, upcoming jobs data will offer more insight into the US economy’s health, with expectations for slight growth in May compared to April leading to a decline in average job growth over the past three months. Any indication that the labor market is still strong could unsettle the market and further delay the chances of a rate cut.