Fed seen cutting US rates in June, risks skewed toward later move
An eagle tops the U.S. Federal Reserve building’s facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst/File photo
BENGALURU – The U.S. Federal Reserve will cut the federal funds rate in June, according to a slim majority of economists polled by Reuters, who also said the greater risk was the first rate cut would come later than forecast rather than earlier.
Reuters surveys since September have consistently predicted the first rate cut would come around the middle of this year. Markets, however, have gone from March to May, and now are priced for June as the most likely time for the first rate reduction.
Although stock markets have surged to record highs, the U.S. 10-year Treasury yield has jumped nearly 50 basis points to 4.28 percent this month alone, thanks to a series of releases showing strong growth, a tight labor market, and still-sticky inflation.
A strong majority of 86 of 104 economists in a Feb. 14-20 Reuters poll said the Fed would first cut the fed funds rate – currently 5.25 percent-5.5 percent – next quarter, similar to last month’s survey.
READ: Fed signals ‘patience’ on rate cuts as data disappoints
But a slim majority, 53 of 104, now expect June as the most likely meeting, with another 33 calling for May. The rest put the first reduction sometime in the second half of 2024. No one predicted a March cut, compared to 16 in previous poll.
Disinflation trend
Over the past month, several Fed officials, including Chair Jerome Powell, said the central bank needed greater confidence in the disinflation trend before cutting rates. Inflation on the Fed’s preferred measure is still above the 2 percent target.
Many analysts are coming around to the view the Fed is determined not to repeat its error in 2021 when it and most other central banks judged high inflation to be “transitory.”
Kevin Cummins, chief U.S. economist at NatWest Markets, recently shifted his forecast for the first Fed cut to June from May as well as reducing the magnitude of cuts likely this year in part “as growth has held up, for now, more than we expected.”
READ: Fed seen deferring rate cuts as inflation stays elevated
Cummins added: “the ‘transitory’ blunder has made officials determined not to be caught on the wrong side of the inflation story for the second time in the same cycle.”
Personal consumption expenditure (PCE) inflation, the Fed’s preferred gauge, is forecast to average around 2% in the second half of 2024, according to the poll, right after the Fed starts cutting.
Consumer prices
But other inflation measures – the consumer price index (CPI), core CPI, and core PCE – were still seen above target at least until 2026, suggesting the Fed won’t be moving quickly on rates once it gets started.
READ: Rents boost US consumer prices in Jan
The world’s largest economy, which grew at a better than expected annualized pace of 3.3 percent last quarter, was predicted to expand an average 2.1 percent this year, above what Fed officials regard as the non-inflationary growth rate of around 1.8 percent.
Around 85 percent of economists, 40 of 47, said the greater risk to their forecast was the first rate cut comes later than they expect rather than earlier, a change from a near-split last month.
Over 60 percent of economists, 64 of 104, predicted 100 basis points of cuts or less this year, including 43 who forecast rates above 4.25-4.5 percent at end-2024. That was broadly in line with fed funds futures and the Fed’s dot plot projection of 75 basis points of easing.
Asked about their estimate of the neutral rate – the rate which neither stimulates nor restricts – the median of 25 forecasts showed 2.75 percent-3 percent. That was higher than previous estimates of around 2.5 percent.
“For now, risks to our growth forecasts are slightly to the upside. If this leads to stickier inflation…The Fed might end up staying on hold for longer than expected,” said Michael Gapen, chief U.S. economist at Bank of America.
