Economists expect the Fed to hint at September rate cuts as inflation cools and the labour market balances
The US Federal Reserve is expected to signal plans to cut interest rates in September during its meeting next week, according to economists surveyed by Bloomberg News.
Nearly three-quarters of the respondents anticipate the central bank will set the stage for a quarter-point cut at the September meeting. However, they are divided on how this will be communicated.
Half of the respondents believe officials will use both the policy statement and Fed Chair Jerome Powell’s press conference to signal the upcoming move. Others think the Fed will use only one of these methods.
All respondents agree that the Fed will maintain rates at their current high at the July 30-31 meeting.
The survey of 47 economists was conducted from July 22-24, following President Joe Biden’s withdrawal from the presidential election.
Recently, Fed officials, led by Powell, have indicated that the labour market has balanced, and inflation is nearing the 2 percent target, making a case for lowering borrowing costs. The central bank is focusing on its goals of maximum employment and stable prices.
“I do believe we are getting closer to the time when a cut in the policy rate is warranted,” said Fed Governor Christopher Waller.
Chicago Fed President Austan Goolsbee noted that with inflation falling, the increasingly restrictive monetary policy may not be necessary since “the economy’s not overheating.”
Nearly two-thirds of the economists expect the Federal Open Market Committee to indicate in the post-meeting statement that officials have gained confidence that inflation is moving towards its target, a step towards cutting rates.
More than a quarter of the respondents do not expect any signalling of rate adjustments at the July meeting, anticipating that clearer communication will follow in the subsequent weeks, possibly during Powell’s speech in Jackson Hole, Wyoming, in late August.
The median view among economists for rate cuts in September and December is slightly less aggressive than market expectations, which predict a 75-basis points reduction this year.
Some investors are betting on an initial half-point cut, but economists see only a 20 percent chance of this, dependent on labour market conditions worsening.
Although the unemployment rate remains relatively low at 4.1 percent, it has edged higher over the past three months, raising concerns about recession risks. The rate has increased from a low of 3.4 percent in early 2023. The July jobs report is expected next week.
Anna Wong, chief US economist at Bloomberg Economics, stated, “The labour market has been cooling for a while — the deterioration isn’t sudden. Given its dual mandate, the Fed is likely behind the curve on cutting rates. As such, we expect the unemployment rate to reach 4.5 percent by the end of 2024.”
One potential complication for the September rate cut is its proximity to the US presidential election in November. Cutting rates less than two months before the election could attract criticism of political motivations.
A third of economists believe this timing would raise the threshold for cuts, requiring more compelling data. However, the rest agree with Powell’s view that the election timing will not impact decisions on borrowing costs.
Despite the uncertainty surrounding the presidential election and congressional control, economists assert that President Biden’s withdrawal from the race has not changed their economic outlook. An overwhelming majority have not altered their forecasts for interest rates or growth due to his decision.
Nonetheless, a third of the Fed watchers indicate that political uncertainty from the election increases downside risks to growth. Changes in tax policies and spending could affect the 2025 economy and potentially interest rates.
“If the federal deficit worsens in 2025, monetary policy will have to tighten and growth will decelerate,” said Thomas Fullerton, an economics professor at the University of Texas at El Paso and one of the survey respondents.
