Fed Rate Cuts and Economic Uncertainty: Insights from Michael Hartnett of Bank of America

Michael Hartnett of Bank of America believes that a Federal Reserve interest rate cut could be the first sign of trouble for the economy. Despite strong economic growth and company earnings, US equities have been rising since October in the face of higher interest rates. Traders are hopeful that the central bank will begin to ease policy before any significant harm is done to economic growth.

According to Hartnett, if the market becomes more certain about lower rates in the latter part of 2024, there is an increasing likelihood of a hard landing. This means a slowdown in economic growth that could lead to a recession. 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.

Upcoming jobs data will offer more insight into the health of the US economy. It is expected to show slight job 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 investors and further delay the chances of a rate cut.

Despite this uncertainty, investors are still putting money into stocks, with US equity funds receiving $4.6 billion in inflows during the seventh week of inflows. Investment-grade bonds also saw inflows of $5.8 billion, marking 32 consecutive weeks of positive flows.