Why ASX 200 investors shouldn't expect interest rate cuts until 2025

Interest rate cuts are looking increasingly unlikely in 2024.

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S&P/ASX 200 Index (ASX: XJO) investors who've been holding their breath for interest rate cuts in 2024 may wish to exhale.

Patience, it seems, is the name of the game for any pending rate cuts from either the Reserve Bank of Australia or the US Federal Reserve.

Which isn't all bad news.

You see, a good part of the entrenched inflation issues that are pushing out the likely timing of interest rate cuts stems from the strength of the Aussie and the US economies. And that strength is being reinforced by the rapid rise of artificial intelligence.

The latest Purchasing Managers' Index (PMI) data out of the US again tells me that ASX 200 companies and investors are unlikely to see any central bank easing until 2025.

Yesterday's data (overnight Aussie time) revealed that business activity in the world's number one economy increased in May at the fastest rate in two years. US labour market figures also recently came in stronger than expectations.

Commenting on the ongoing strength of the US economy, National Australia Bank Ltd (ASX: NAB) said (quoted by The Australian Financial Review):

US yields rose, the USD was higher and US equities fell. Stronger PMI data out of the US was the proximate driver, and while those did come in much stronger than expected, the context of upside surprises in US economic data having been rare for the last month or so may have supported the size of the market reaction.

The market reaction NAB is referring to includes the 0.7% overnight decline on the S&P 500 Index (SP: .INX). And those headwinds see the ASX 200 down 1.1% in afternoon trade today.

ASX 200 shares can boom amid high rates

It's worth recalling that in 2023, a year which saw the RBA and the Fed hiking interest rates aggressively, the ASX 200 gained 9.3%. If we add in the dividends many companies paid, then the accumulated gain in 2023 was around 13.9%.

As for the S&P 500, it soared 24.2% in 2023 and is up another 10.4% so far in 2024. And according to JPMorgan Chase & Co, the S&P 500 is likely to continue breaking record highs this year, fuelled by the AI boom.

"With the AI-theme still delivering and the macro hypothesis intact, we are likely to continue to make new all-time highs," the broker said (quoted by Bloomberg).

With that in mind, here's what the experts are saying about the prospects for rate cuts in 2024.

Odds of 2024 interest rate cuts fading

Goldman Sachs CEO David Solomon has essentially written off any chance that ASX 200 investors might see the Fed cut rates this year.

According to Solomon (courtesy of the AFR)

I still don't see the data that's compelling to see we're going to cut rates here…

If you're talking to CEOs that are running businesses that really deal with what I'll call the middle of the American economy, those businesses have been starting to see change in consumer behaviours.

Inflation is not just nominal. It's cumulative, and so everything is more expensive. You're starting to see the consumer, the average American, feel this.

Indeed, the minutes from the 1 May Federal Open Market Committee reinforce my belief that ASX 200 investors shouldn't expect a rate cut until 2025.

Those minutes revealed members noted "that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2%" amid "disappointing" inflation prints this year.

Commenting on the Fed minutes, FHN Financial's Chris Low said (quoted by Bloomberg), "The minutes are a reminder that while the Fed does not see another rate hike as likely, and certainly does not see it as a base-case, it will not rule out hikes if inflation does not behave."

With that said, ASX 200 investors could still see a Fed rate cut in September.

"Fed members have indicated they want to see more progress on inflation. Fortunately, the US economy still looks robust enough to take an extended rate pause. We continue to look for the first Fed rate cut in September," Strategas Securities' Don Rissmiller said.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group and JPMorgan Chase. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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