The Federal Reserve is widely expected to reduce interest rates by 25 basis points at each of its three remaining policy meetings in 2024, signaling a shift towards a more accommodative monetary stance amid signs of moderating inflation and a cooling economy.
This expectation, based on a Reuters poll of economists, reflects growing sentiment that the Fed is looking to ease the economic burden without causing an excessive shock to financial markets.
According to the poll, 92 of the 101 economists surveyed anticipate a quarter-percentage-point reduction when the Federal Open Market Committee (FOMC) concludes its upcoming meeting on September 18. The Fed has held its federal funds rate steady in the 5.25%-5.50% range since July 2023, but with inflation now approaching the central bank’s 2% target and the labor market showing signs of softening, there is consensus that it’s time to dial back.
However, not everyone is aligned with the Fed’s more cautious approach. A small minority, just nine economists, predicted a more aggressive move—a half-percentage-point cut. But recent market indicators suggest this is unlikely. Following the release of August’s mixed jobs report, there was a brief period where futures markets priced in a 50% chance of a larger cut, but those odds have since dwindled to just one in four.
The case for moderation was strengthened by remarks from key Fed officials, including New York Fed President John Williams and Fed Governor Christopher Waller. Both offered cautious but steady outlooks on the economy, indicating little appetite for an outsized rate cut. As Stephen Stanley, chief U.S. economist at Santander, noted, “The employment report was soft but not disastrous. Both Williams and Waller gave a relatively benign assessment of the economy, which points strongly to a 25-basis-point cut.”
In fact, the data supports a steady course. The U.S. economy grew at a robust 3.0% annualized pace in the second quarter of 2024, outpacing the Fed’s projection of a non-inflationary growth rate of 1.8%. While there are concerns of a slowdown, most experts see the economy continuing to grow moderately, avoiding a severe recession that some had feared.
Fed’s Balancing Act
For months, the Federal Reserve has been walking a fine line between controlling inflation and sustaining economic growth. The latest poll highlights the delicate balancing act that Fed officials are attempting. They’re keenly aware of the risk of doing too little to rein in inflation, while also mindful that an overly aggressive approach could stifle growth and increase unemployment. The unemployment rate is expected to remain steady at around 4.2% through 2026, and personal consumption expenditures (PCE) inflation—one of the Fed’s preferred measures—is projected to hit the 2% target by the first quarter of 2025.
But the Fed’s apparent caution doesn’t mean they’ve taken their eyes off the inflationary ball. Despite the optimism among economists, a sizable chunk of market participants remains skeptical that inflation will cool as quickly as predicted. Bank of America’s senior U.S. economist, Aditya Bhave, warned that if the Fed opts for a more aggressive 50-basis-point cut in September, markets may interpret that as an admission that the central bank has fallen behind in its fight against inflation. “We think markets would take that as an admission it is behind the curve and needs to move to an accommodative stance, not just get back to neutral,” Bhave said.
Three Rate Cuts Likely in 2024
As the year progresses, the likelihood of additional cuts remains high. A majority of economists polled expect the Fed to deliver two more 25-basis-point rate cuts, one in November and another in December. That would bring the total number of cuts for 2024 to three, easing borrowing costs while keeping inflation in check. Among the primary dealers surveyed, 11 of 19 predict that the Fed will lower rates by a total of 75 basis points by year’s end.
This shift in monetary policy comes as the economy shows mixed signals. While inflation appears to be stabilizing and growth remains resilient, there are lingering concerns about a possible downturn. Yet, despite these fears, the median probability of a recession, according to the poll, remains at just 30%—a figure that has held steady throughout the year.
Ultimately, the Fed’s approach will be driven by data, particularly inflation and employment reports, as they continue their efforts to manage the delicate balance between economic growth and inflation control. What’s clear is that they intend to proceed cautiously, opting for smaller rate cuts to avoid the perception that they’ve lost control of the inflation fight. As 2024 unfolds, all eyes will remain on the central bank’s next moves and how they impact the broader U.S. economy.
This wait-and-see approach may offer some relief to consumers and businesses as borrowing costs decrease, but it also underscores the uncertainty that still looms large in the Fed’s decision-making process. The September 18 meeting will provide a clearer picture of how the central bank plans to navigate these choppy economic waters.
