US Federal Reserve Interest Rate Cut Projections for 2024 and 2025
The US Federal Reserve is anticipated to initiate its first interest rate cut of the year in September, followed by further reductions in December and the first quarter of 2025, according to expert predictions.
Philip Marey, a senior US strategist at Rabobank, remarked that the March inflation data in the US significantly altered expectations, negating the Fed’s plans to begin rate cuts in June. “We now foresee the first rate cut in September and a subsequent one in December,” he stated. Marey emphasized that the only imminent decision from the bank would likely be to decelerate its balance sheet reduction process, potentially halving the pace by May.
Chris Rupkey, chief economist at FWD Bonds, pointed out that changes in core inflation might slow in the second and third quarters of 2024. “In this scenario, our expectation is for the first rate cut in September. It will test the Federal Reserve's political neutrality, given the proximity to the presidential election,” he explained.
James Knightley, chief international economist at ING, highlighted that high inflation coupled with robust economic activity and employment figures have shifted market expectations for a rate cut to December. “We still see potential for a September rate cut,” he commented. Knightley also noted that the Fed might adopt a cautious approach, signaling that if inflation remains high, interest rates will stay elevated.
The Complex Role of the Federal Reserve
Navigating these decisions is incredibly challenging. The Federal Reserve employs approximately 600 economists who study national and local economies, analyze research, convene conferences, and seek advice from diverse sources. They also gather insights from local business leaders, who may have more current information on local conditions than national data can provide.
The Fed utilizes numerous forecasting models and monitors various economic indicators, such as the Atlanta Fed's "GDP Now," which offers real-time estimates of the nation's GDP. They also track frequently updated data products like the Sahm Rule for recessions and the University of Michigan's Consumer Sentiment Survey.
Economic Resilience and Future Rate Cuts
One of the Fed's primary focuses is inflation. Over the past two years, their efforts have aimed to restrain inflation to avoid plunging the economy into a recession. Recent data indicates a significant slowdown in inflation, with the U.S. slightly dipping into the deflationary range according to the Fed's preferred measure.
Felix Schmidt, a senior economist at Berenberg Bank, observed that despite the Fed's significant rate hikes totaling over 500 basis points in 2022 and 2023, the US economy remains remarkably resilient. He attributed this resilience to loose fiscal policies, including substantial public investment increases that counteract monetary restrictions.
Schmidt pointed out that demand hasn't been bolstered by extensive subsidies for private investment or government spending following the artificial consumption surge driven by overly generous policies. “The ongoing dynamic economic conditions, tight labor market, and stalled disinflation will likely prompt the Fed to maintain the key interest rate at its current level until the end of 2024,” he stated.
Schmidt predicts that once fiscal stimulus measures wind down in 2025, the Fed might gradually shift towards loosening monetary policy. The cumulative impact of these factors suggests a cautious yet strategic approach by the Federal Reserve as it navigates the complex interplay of economic indicators, political influences, and fiscal policies.
By closely monitoring these developments, investors and market participants can better prepare for the anticipated changes in the US interest rate landscape over the coming years.
Economic Growth and Labor Markets
Economic growth has been robust but is showing signs of slowing. The labor market remains strong, with consistent job creation ranging from 160,000 to 310,000 monthly jobs over the past year. GDP growth has also been unexpectedly strong, with the U.S. outperforming other developed nations regarding goods and services produced. The Fed forecasts a GDP growth of 2.1% for 2024, slightly declining to 2% in 2025, compared to an average annual growth rate of 1.8% from 2017-2020.
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