A significant majority of economists surveyed by Reuters now anticipate the U.S. Federal Reserve will initiate a series of interest rate reductions this year, commencing in September. This sentiment comes amid upward revisions in inflation forecasts for the second consecutive month.
Despite Fed officials signaling a rate cut as the next course of action, persistent inflation concerns and escalating price expectations have cast some uncertainty over the timing and magnitude of such a move.
While financial market indicators and economists alike foresee a negligible likelihood of rates remaining stagnant throughout the year, the prevailing view now leans towards the Fed exercising patience until September before implementing any adjustments.
In the recent Reuters poll conducted in early May, nearly two-thirds of the economists surveyed projected the initial rate cut to occur in September, targeting a range of 5.00%-5.25%. This reflects a notable shift compared to the previous month’s survey, where only slightly over half of the respondents anticipated a September cut.
One of our analysts highlighted the challenges posed by persistently elevated inflation figures throughout the first quarter, emphasizing the need for a clear change in trend before the Fed can comfortably initiate rate reductions. The analyst suggested that several months of positive data might be required to justify such action.
Upcoming consumer price index (CPI) data for April will be a critical factor in shaping rate cut expectations, with any upside surprises potentially influencing the outlook towards fewer cuts.
The personal consumption expenditures (PCE) price index, a key gauge for the Fed’s 2% inflation target, has also been trending higher recently, indicating that the hurdle for a rate cut remains substantial.
Economists have broadly revised their inflation forecasts for 2024 upwards, signaling a persistent challenge in achieving the Fed’s target. However, it’s worth noting that some analysts acknowledge the possibility of the cutting cycle being delayed until November or even limited to a single cut in 2024.
Approximately 60% of the economists surveyed anticipate two quarter-point cuts this year, representing a significant increase compared to the previous month’s findings. Nevertheless, the proportion expecting more than two reductions has dwindled, with a notable contingent predicting only one cut or none at all.
The prevailing consensus among economists remains that the likelihood of the Fed maintaining current rates for the rest of the year is low.
On the topic of the Fed’s neutral rate, the median estimate from respondents now stands at 3.00%-3.25%, indicating a higher range than previously assessed.
The U.S. economy, despite growing at a slower-than-expected pace in the last quarter, is projected to expand by 2.4% this year, exceeding the Fed’s current estimate for non-inflationary growth.
