BENGALURU (Reuters) – The Federal Reserve is anticipated to reduce interest rates twice this year, in September and December, as robust U.S. consumer demand necessitates a cautious approach despite the moderation of inflation, according to an increasing consensus among economists surveyed by Reuters.
The past few months have seen a decline in price pressures, coupled with recent indications of labor market weakness. These factors have instilled “greater confidence” among several members of the Federal Open Market Committee (FOMC) that inflation will revert to the U.S. central bank’s 2% target without triggering a significant economic downturn.
Taking advantage of this sentiment, markets have priced in the possibility of two to three rate cuts this year, leading to a roughly 2% rise in stocks and a more than 25 basis points decrease in the yield on the 10-year Treasury note this month. However, economists have consistently predicted just two rate cuts over the past four months and are now even more certain of this outlook.
June’s retail sales were stronger than anticipated, indicating that consumer spending remains robust. This, coupled with a consensus from a recent poll suggesting the unemployment rate will not rise significantly from its current 4.1%, supports a cautious approach.
According to a Reuters poll conducted from July 17-23, all 100 surveyed economists believe the Federal Reserve will maintain current rates on July 31. However, over 80% (82 out of 100) predict a 25-basis-point cut in September, which would lower the federal funds rate to the 5.00%-5.25% range. This represents a stronger consensus compared to nearly two-thirds who held this view last month.
Fifteen economists expect the first rate reduction to occur in November or December, while only three anticipate the Fed will wait until next year.
Jonathan Pingle, chief U.S. economist at UBS, stated, “We expect a 25-basis-point reduction in the target range at the September and December FOMC meetings, barring a meaningful upside surprise in the inflation data.”
We believe that only significantly weak employment data would create the urgency required to lower rates further this year.
Nearly three-quarters of economists, or 73 out of 100, predicted two 25-basis-point cuts this year, up from approximately 60% in the June survey. In the latest poll, 70 economists anticipated these cuts would occur in September and December.
While 16 economists expected one or no cut this year, 11 forecasted more than two cuts. Among 21 primary dealers surveyed, nearly 60%, or 12, anticipated that the Federal Reserve would reduce rates twice in 2024.
This outlook will largely depend on key data releases this week, including the second-quarter gross domestic product (GDP) reading and the June personal consumption expenditures (PCE) price index data.
The U.S. economy likely expanded at an annualized rate of 2.0% last quarter, surpassing the 1.4% growth in the first quarter. However, PCE inflation—which the Federal Reserve targets at 2%—is projected to have only slightly decreased to an annual rate of 2.5% in June from 2.6% in May, according to a separate Reuters survey.
According to median forecasts in the latest poll, none of the key inflation measures—Consumer Price Index (CPI), core CPI, PCE, and core PCE—are expected to reach the 2% target until at least 2026.
A little over half of the economists surveyed—17 out of 30—believe that inflation for the remainder of the year is more likely to be higher than their forecasts rather than lower.
“Inflation has been very difficult to forecast this year and has behaved unpredictably. Rents, for example, have been far more persistent than anyone expected,” said Chris Low, chief economist at FHN Financial.
“As long as we have moderate growth, the Fed can be patient,” he added.
According to median forecasts from a recent survey, the Federal Reserve is expected to cut interest rates once each quarter through 2025, ultimately bringing the federal funds rate to a range of 3.75%-4.00% by the end of that year.
The U.S. economy is projected to grow by 2.3% this year, surpassing the Fed’s current estimate of the non-inflationary growth rate at 1.8%. Growth is anticipated to continue at 1.7% in 2025 and 2.0% in 2026, based on the poll’s findings.
(Additional reports from the Reuters global economic poll)
(Reported by Indradip Ghosh; Polling conducted by Milounee Purohit, Vijayalakshmi Srinivasan, and Mumal Rathore; Edited by Ross Finley and Paul Simao)