The Fed's first rate cut won't happen until June after surprisingly cautious guidance from the central bank, Bank of America says

• The first Fed rate cut probably isn't coming until June, according to Bank of America.
• Central bank chief Jerome Powell pushed back on hopes for a March rate cut on Wednesday.

The Fed's first rate cut is now unlikely to come in March after the central bank struck a surprisingly hawkish tone at Wednesday's Federal Open Market Committee meeting, according to Bank of America. The firm now sees June as the most likely starting point.

BofA strategists pointed to Fed Chair Jerome Powell's presser on Wednesday, after the central bank decided to keep interest rates level and pushed back on hopes for a March rate cut. Central bankers aren't expecting to lower rates until they have more confidence inflation will return to its 2% target, the FOMC said in a statement.

"I would tell you that I don't think it is likely that the committee will reach a level of confidence by the time of the March meeting to identify March at as the time to [cut interest rates]," Powell said at a press conference Wednesday afternoon.

That spells bad news for investors, who have been pricing in an aggressive pace of rate cuts this year — around 150 basis-points of cuts by the end of 2024, according to the CME FedWatch tool. The S&P 500 suffered its worst drop of the year on Wednesday following the Fed comments.

But investors could still rewarded by a "later and faster" pace of rate cuts as they ramp them up later in 2024, according to Bank of America.

"Based on the outcome of the January FOMC meeting, we now look for the rate cut cycle to begin in June and expect 25 bp of rate cuts in June, September, and December," bank strategists said in a note, later adding that Powell's comments were a "surprise."

Investors still see an aggressive pace of rate cuts by the end of the year, despite lowered hopes for a March cut. Traders have priced in a 72% chance the Fed will slash rates at least six times by the end of 2024, according to the CME FedWatch tool.

"Markets apparently don't agree with a gradual pace of rate cuts once the Fed starts. Markets may be saying the Fed needs to choose between 'sooner and slower' and 'later and faster.' For now, it's voting on the later. We agree that risks to our new baseline tilt in this direction," the bank said.

Experts have warned that Fed rate cuts could be a double-edged sword for the economy, particularly if the Fed cuts interest rates rapidly. The only reason the Fed would slash interest rates quickly is to prevent or pull the economy out of a recession, "Bond King" Jeff Gundlach previously warned.

Central bankers maintained their Fed Funds rate target at 5.25%-5.5% this week, the highest rates have been since 2001. Investors are now pricing in a 63% chance the Fed will continue to keep rates level in March, up from just 12% odds priced in a month ago.