A majority of economists surveyed by Reuters anticipates that the U.S. Federal Reserve will defer interest rate cuts until the second quarter, with June being deemed more probable than May. This contrasts with current market expectations, which anticipate more easing this year. Previously, economists projected the first rate cut around mid-2024, but after Chair Jerome Powell hinted at a possible discussion of cuts during last month’s Fed meeting, markets began pricing in a move as early as March.
Despite initial expectations for a March cut, recent data and comments from Fed officials have tempered these anticipations. Federal funds futures pricing for the first cut shifted to May, diverging from the previous 90% probability of a March move. In a recent Reuters poll conducted from January 16 to 23, all 123 economists predicted that the Federal Open Market Committee would maintain the fed funds rate at 5.25%-5.50% on January 31. However, a majority of 86 respondents indicated that rate cuts are likely to commence next quarter.
Of those, nearly 45%, or 55 economists, expect a June start, while 31 foresee May. Only 16 anticipate a cut in March, and the remaining economists project rate cuts in response to cooling inflation in the second half of the year. The survey results reveal a shift from the previous poll conducted before the December FOMC meeting, where 51% of economists did not foresee a rate cut in the first half of 2024.
Economists appear divided on the risks to their forecasts, with some expressing concern that the cut might occur later than expected, while others believe it could happen earlier. The survey aligns more closely with the Fed’s own predictions, as the median forecast places the fed funds rate at 4.25%-4.50% at year-end, in line with the previous month. Furthermore, a majority of economists anticipate 100 basis points of cuts or less this year, contrasting with market expectations of over 125 basis points, which have recently decreased from 150.
Regarding inflation, the survey projects that the personal consumption expenditure (PCE) will average around the central bank’s 2% target in the second half of 2024, down from 2.6% in November. However, other inflation measures such as the consumer price index (CPI), core CPI, and core PCE are expected to remain above 2% at least until 2026. Out of 41 economists responding to an additional question, 30 see low risk of a significant resurgence in inflation over the next six months, while 11 view such risk as high.
Despite the U.S. economy’s growth at a 4.9% annualized pace in the third quarter, economists now expect a 2.0% expansion in the last quarter, with growth averaging 1.4% this year. With the likelihood of avoiding a recession, economists find little justification for early interest rate cuts, anticipating the first rate cut in June unless the FOMC expresses concerns about a recession. The unemployment rate, currently at 3.7%, is expected to mildly increase to an average of 4.1% this year and next.
