Market Analysis

According to a recent Reuters poll, a majority of economists anticipate that the Federal Reserve will reduce interest rates by 25 basis points at each of its remaining policy meetings in 2024. Only nine out of 101 economists forecast a half-percentage-point cut at the Fed’s next meeting.

As inflation nears the Fed's 2% target and signs of an economic slowdown emerge, Fed policymakers have indicated that it is time to start lowering the federal funds rate, which has been held in the 5.25%-5.50% range since July 2023.

Following a mixed jobs report for August released on Friday, futures markets briefly implied a greater than 50% chance of a half-percentage-point cut next week. However, this probability has since dropped to about 25%. Despite this, the rate markets are still anticipating over 100 basis points of cuts within the year.

Comments from New York Fed President John Williams and Fed Governor Christopher Waller last week did not suggest support for a larger rate cut this month.

A strong majority of economists surveyed between September 6-10 expect the Federal Open Market Committee (FOMC) to implement a 25-basis-point cut when it concludes its meeting next week.

Stephen Stanley, chief U.S. economist at Santander, noted that the mixed employment report, coupled with Williams and Waller’s neutral assessment of the economy, suggests a 25-basis-point cut is more likely than a 50-basis-point reduction.

Santander has been consistent in its end-year rate forecast throughout 2024, initially predicting a total of 50 basis points of cuts, but adjusting to 75 basis points in July.

Among primary dealers surveyed, 54 out of 71 economists believe a 50-basis-point cut at any of the Fed's remaining meetings this year is unlikely, with 13 considering it likely and four deeming it very likely.

Aditya Bhave, senior U.S. economist at Bank of America, remarked that a 50-basis-point cut in September would signal that the Fed is behind the curve and needs to shift to a more accommodative stance rather than simply returning to neutral.

While economists have generally forecasted two rate cuts this year, the number has increased to three in recent months. Some argue that these cuts are intended not to counter an ailing economy but to ease policy restrictions as inflation moves closer to the Fed’s target.

The median probability of a recession, according to the latest poll, remains at 30%, showing little change despite recent market concerns about a potential economic downturn.

Following next week’s meeting, the Fed is expected to make two additional 25-basis-point rate cuts in November and December, according to 65 of 95 economists, up from 55 of 101 last month.

Among 19 primary dealers surveyed, 11 predict a total of 75 basis points of rate cuts this year. The U.S. economy, which grew at an annualized rate of 3.0% in the second quarter, is projected to expand at or above the Fed's non-inflationary growth rate of 1.8% in the coming years. The unemployment rate is expected to remain around the current 4.2% through the end of 2026, while the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation measure, is forecasted to reach the 2% target by the first quarter of 2025.

Paraphrasing text from "Reuters" all rights reserved by the original author.