by Indradip Ghosh
BANGALORE (Reuters) – The U.S. Federal Reserve (Fed) is expected to cut the federal funds rate twice this year, starting in September, according to a large majority of economists polled by Reuters, who overall raised their forecasts. inflation for the second consecutive month.
Despite reassuring speeches from several Fed officials who suggested that the central bank’s next big move would be a reduction in borrowing costs, some investors continue to doubt whether such a move could be implemented this year. This doubt is fueled by the slow decline in inflation and the increase in expectations about price developments.
Fed funds futures, however, show that rates are highly unlikely to remain unchanged through the end of the year, a forecast shared by economists.
But compared to the previous survey, they are now more convinced that the Fed will wait until September to carry out its first monetary easing in the current cycle.
In detail, nearly two-thirds of economists surveyed from May 7 to 13, or 70 out of 108, forecast a first rate cut in September, which would bring the federal funds target down from a range of 5.25% – 5.50% at a range of 5.00%-5.25%.
In last month’s survey, only a little more than half of the economists polled expected a decline in the interest rate in September.
The new survey also shows that only 11 people expect a rate cut in July and none are betting on a cut in June, compared to 26 and 4 respectively in the April survey.
BAD NEWS
“We had nothing but bad news on the inflation front during the first quarter… all these accelerations in inflation were too large to allow rate cuts,” explains Chris Low, chief economist at FHN Financial. He says he expects the Fed to cut rates twice this year, in September and November.
“For the Fed to cut rates, we need to see a change in trend. One month of good news will not be enough to allow a cut, it takes several months. There is a fairly significant risk that it will do so unless twice,” he added.
US Consumer Price Index (CPI) figures for April will be released on Wednesday. The Reuters consensus forecasts an increase of 0.4% month-on-month, as in March. An upward surprise on inflation could, however, lead to a change in forecasts resulting in fewer interest rate cuts.
The Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred measure of inflation, has been rising in recent months, suggesting the bar for a rate cut is still high.
In the new Reuters survey, economists significantly revised upward their inflation outlook for this year, whether CPI, core CPI, PCE and core PCE, for the second month in a row.
None of these indicators are expected to fall back to 2% before at least 2026.
“We readily admit that it would not take much for the start of the taper cycle to be pushed back to November. Furthermore, the risks to this forecast are heavily tilted towards a single rate cut in 2024 rather than three declines,” note Wells Fargo economists.
About 60% of participants in the new Reuters survey, or 65 out of 108, expect two quarter-point rate cuts this year, compared with half of those polled in the survey a month ago.
However, only 17 participants now expect more than two rate cuts, or half of the 34 participants in the April survey. Twenty-five of them predict only one drop, and one predicts none.
A majority of more than 60% of economists who answered a subsidiary question, or 26 out of 41, considered it unlikely or very unlikely that the Fed would maintain its rates at their current levels for the rest of the year.
Asked about the level of the Fed’s neutral rate, that is to say the one which neither stimulates nor slows down economic activity, the median of the 29 answers was 3.00%-3.25%, a level more higher than in previous estimates.
The U.S. economy, which grew at a slower-than-expected annualized rate of 1.6% in the first quarter, is expected to grow 2.4% this year. This pace is higher than the growth rate considered by Fed officials to be non-inflationary, currently estimated at 1.8%.
(Reporting by Indradip Ghosh, investigations by Purujit Arun and Sujith Pai, by Claude Chendjou, edited by Blandine Hénault)
Copyright © 2024 Thomson Reuters
I have over 8 years of experience working in the news industry. I have worked as a reporter, editor, and now managing editor at 247 News Agency. I am responsible for the day-to-day operations of the news website and overseeing all of the content that is published. I also write a column for the website, covering mostly market news.
