Economists are divided over how much interest rate cuts Federal Reserve officials are planning for 2024 at their policy meeting next week, following a sharp rise in recent inflation figures.
Policymakers are likely to abandon their long-standing forecast of three rate cuts this year, but whether or not they will make two more rate cuts remains in doubt. According to a Bloomberg poll, 41% of economists expect the scatter plot to show two contractions, while 41% expect forecasts to show only one contraction or no contraction at all.
The Federal Open Market Committee, which has held its benchmark rate at two-decade levels since last July, was encouraged by a sharp decline in inflation in the second half of 2023 and outlined a gradual rate cut this year. But those plans have been delayed due to lack of progress by early 2024.
“The Fed is awaiting a series of data that will bolster its confidence that inflation is moving steadily toward its 2% target,” Ryan Sweet, chief U.S. economist at Oxford Economics, said in a survey response. “The balance of risks to our inflation outlook remains tilted to the upside.”
Officials are almost certain to keep the rate steady at between 5.25% and 5.5% for the seventh straight meeting next week. Chairman Jerome Powell and his colleagues will update their economic and rate forecasts at their June 11-12 meeting for the first time since March.
A smaller reduction will mean a later start of the reductions. That could have implications for the presidential election in November, although Fed officials are unanimous in saying their decisions are based solely on economic considerations.
Fed watchers expect the first cut to come at the central bank’s September policy meeting, the last meeting before voters head to the polls on Nov. 5. domestic product at an annual rate of 2.1% and an unemployment rate at the end of the year of 4%.
The survey of 43 economists was conducted from May 31 to June 5.
The vast majority of those surveyed said the Fed would cut rates in response to lower inflation rather than some labor market shortage or economic shock. Neither economist said there was a strong likelihood that the next rate hike would be higher, an outcome sometimes mentioned as possible by officials such as Minneapolis Fed Chairman Neel Kashkari.
A number of Fed policymakers have said in recent weeks that they see no rush to cut rates as inflation becomes more resilient and growth prospects remain stable. Inflation by the Fed’s preferred measure was 2.7% for the year through April, and economists expect relatively little progress toward the central bank’s 2% target in the second half of the year, compared with weak monthly rates at the end of 2023.
Before the voluntary quiet period, Fed Chairman Christopher Waller said the central bank could consider cutting rates “later this year,” a view echoed by Atlanta Fed President Raphael Bostic. Cleveland Fed Governor Loretta Mester said she wants to see “a few more months of inflation data that looks like it’s falling,” while Boston Fed spokeswoman Susan Collins said “patience really matters.”
Nearly all respondents expect the Fed to maintain its May 1 guidance that no tapering would be appropriate until the central bank has greater confidence that inflation is on a steady path toward 2%. Economists are divided on how the FOMC will characterize inflation, with most expecting the committee to reiterate that there has been little progress recently.
“The FOMC will likely say there is some encouraging data, but it needs to see more evidence to return confidence,” said Luke Tilley, chief economist at Wilmington Trust.
On the second day of the meeting next week, the government will publish the May consumer price index. While the Fed focuses on an individual price measure, the consumer price index is expected to show a continued cooling in inflation.
“The CPI reading will likely influence the FOMC’s tone,” said Stephanie Roth, chief economist at Wolfe Research. “While we expect moderate growth, a figure below 0.30% could be seen as further evidence of slowing inflation.”
Fed officials have been predicting a soft landing for the economy since last July. Economists themselves are becoming increasingly optimistic about the prospects for economic growth. Just 3% of respondents forecast a recession in the next 12 months, far below the 58% seen in July last year.
While Fed leaders have not given a clear picture of what specific set of economic indicators will lead to rate cuts, 60% of economists said three consecutive positive core inflation reports would be an important catalyst. Inflation data for January-March was disappointing, and economists say an equal number of good reports will set the stage for rate cuts.
In addition, “clear evidence of a slowdown in the labor market” could lead to lower rates, said Elizabeth Kopelman, US economist at Skandinaviska Enskilda Banken AB.
The government’s employment report for May, released Friday, showed a mixed picture As for the state of the labor market. Job and wage growth accelerated, although the unemployment rate increased and the labor force participation rate fell.
Traders believe the jobs data could push back the timing of an overall rate cut, and now expect a cut of about 1.5-quarter points this year, according to futures contracts.