Forecast by Economists

By Indradip Ghosh and Prerana Bhat

BENGALURU, Feb 20 (Reuters) – Analysts foresee the U.S. Federal Reserve making a federal funds rate cut in June, according to a slim majority of economists polled by Reuters. They also indicated that the greater risk is that the first rate cut could occur later than anticipated rather than sooner.

Over the past months, Reuters surveys have consistently suggested that the initial rate cut would likely materialize around the middle of 2024. However, market projections have evolved from March to May and are presently priced for June as the most probable time for the first rate reduction.

Economic Indicators

In spite of stock markets surging to record highs, the U.S. 10-year Treasury yield has soared nearly 50 basis points to 4.28% this month alone, propelled by robust growth, a tight labor market, and persistent inflation.

A significant majority of 86 out of 104 economists, according to a Feb. 14-20 Reuters survey, anticipate the Fed to execute the first cut of the fed funds rate – currently at 5.25%-5.50% – next quarter, mirroring similar sentiments from the previous month’s survey.

However, a slight majority of 53 out of 104 now identify June as the most likely meeting, with an additional 33 expecting May. The remaining respondents place the first reduction at some point in the latter half of 2024. Notably, no respondents predicted a March cut, in contrast to 16 in the previous survey.

Fed’s Standpoint

Over the past month, several Fed officials, including Chair Jerome Powell, have emphasized the necessity for a greater level of confidence in the disinflation trend before initiating rate cuts. Notably, inflation on the Fed’s preferred measure still surpasses the 2% target.

Analysts’ Insights

Kevin Cummins, chief U.S. economist at NatWest Markets, recently adjusted his forecast for the first Fed cut from May to June, citing unexpectedly resilient growth. Cummins underlined the Fed’s determination to avoid a repetition of the “transitory” inflation misjudgment witnessed in 2021.

Furthermore, the Reuters poll projects the Fed’s preferred gauge of inflation, the Personal Consumption Expenditure (PCE) index, to average around 2% in the second half of 2024, following the commencement of rate cuts.

Despite this, other inflation measures such as the Consumer Price Index (CPI), core CPI, and core PCE are anticipated to remain above target until 2026, indicating that the Fed is unlikely to swiftly adjust rates once it commences the process.

The underlying predictions for the world’s largest economy include an average expansion of 2.1% this year, exceeding the non-inflationary growth rate of approximately 1.8% as perceived by Fed officials.

Risk Assessment

A remarkable shift in sentiment is evidenced by around 85% of economists, with 40 out of 47 suggesting that the greater risk is the first rate cut taking place later than expected rather than earlier, marking a departure from the stance observed in the previous month.

Additionally, over 60% of economists (64 out of 104) anticipate 100 basis points of cuts or less this year, with 43 forecasting rates above 4.25-4.50% at the end of 2024. These forecasts generally align with fed funds futures and the Fed’s projection of 75 basis points of easing.

Moreover, the median of 25 forecasts for the neutral rate – the rate that neither stimulates nor restricts – stands at 2.75%-3.00%, surpassing prior estimates of around 2.5%.

Expert Opinion

Michael Gapen, chief U.S. economist at Bank of America, alluded to the potential implications of marginally more optimistic growth forecasts. He suggested that if this trend influences stickier inflation, the Fed might prolong their decision to maintain the existing interest rates.

Reuters poll – Federal Reserve rate cut projections – February 2024 https://tmsnrt.rs/4bGMyKy

(Reporting by Indradip Ghosh and Prerana Bhat; Polling by Sarupya Ganguly and Maneesh Kumar; Editing by Ross Finley and Chizu Nomiyama)

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