What do some of Canada's foremost economic minds expect?
January always feels like the longest month, especially when you are keen to find out how the U.S. Federal Reserve is going to shape the trajectory for interest rates.
The Fed’s FOMC meeting takes place Wednesday against a backdrop of a resilient economy with CPI stats still running higher than ideal despite an overall fall in inflation, giving the central bank decision makers a tough balancing act between keeping rates higher for longer or risking sending inflation in the wrong direction.
The BoC opted to hold rates steady at its meeting last week and a rate cut by the Fed this month is ruled out by consensus, but the big question is what will happen in March? Many investors are anticipating a first cut then, but what do some sharp economic minds believe is likely?
PIMCO
“We agree March could very well be a ‘live meeting,’ with the potential for a rate cut,” PIMCO economist Tiffany Wilding shared with Wealth Professional. “We expect the Fed will give itself that optionality by removing the hiking bias in its forward guidance at its next meeting on 31 January.”
Wilding cautioned though that “the balance of data and macroeconomic trends points to an initial rate cut closer to midyear. Our outlook reflects U.S. inflation data – including the widening gap between two important price indices – as well as continuing resilience in economic growth and the historical tendency for central banks to cut rates later than sooner.”
She noted that the Fed’s communications since December have been indicative of a more cautious approach that would suggest a longer wait for rate cuts.
RBC
At RBC Economics, Nathan Janzen and Abbey Xu are also dovish on rate cuts in their recent commentary:
“Another round of strong GDP data in Q4 showed that the economy is still weathering higher interest rates better than expected. But slowing price growth is leaving the Fed with flexibility to hold the line on interest rates for now – and to respond with lower rates later this year (we expect before mid-year) once the economy starts to soften more significantly.”
The duo is expecting this Friday’s U.S. labour market report to show a smaller increase in payroll than last month and a further increase in the unemployment rate, reflective of a softening economy.
TD
TD Economics’ Rishi Sondhi says that the data is mixed especially with two key measures of inflation diverging. He believes the Fed has time – and the data – on its side.
“With the economy showing no signs of keeling over, and the labor market still relatively tight, policymakers can afford to be patient. Fed officials will want to see at least a few more ‘soft’ readings on inflation and a bit more easing in the labor market before pulling the trigger on rate cuts,” he wrote in a report.
CIBC
At CIBC Economics, Avery Shenfeld and the team are not expecting the Fed to make deep cuts to interest rates throughout 2024, forecasting total cuts of 100 basis points which he notes should be enough to avoid a slowdown turning into a full recession.
He says the Fed is not showing signs of being desperate to cut rates early either and is not expecting a change this week with investors and consumers having to remain patient.
“There’s no new forecast or interest rate projection this time, but [Fed chair Jerome] Powell is likely to laud progress on inflation and indicate a willingness to ease policy if the economy decelerates and inflation remains under wraps, leaving markets to decide on their own when those conditions will be met,” Avery concluded.
Other views
Meanwhile, Bloomberg economists Stuart Paul and Estelle Ou are among those calling for a March cut.
“The stage is set for the Fed to take steps toward cutting rates in coming months. We expect the Fed to begin lowering the federal funds rate target range in March as it attempts to stick a soft landing,” they said.
But Bankrate.com chief financial analyst, Greg McBride takes an opposing view.
“There is nothing in the economy compelling the Fed to cut rates as soon as March – which investors have been pinning their hopes to – so expect the Fed to push back by emphasizing that inflation still needs to show further improvement,” he opined.
