The US Federal Reserve will cut interest rates by 25 basis points at each of its last three meetings in 2024, another reduction from forecasts last month, based on a slim majority of economists polled by Reuters who said a recession was unlikely.
The change in the Fed's rate cut forecast comes after a weaker-than-expected July US jobs report, which prompted interest rate futures traders to price in a 120 basis point cut in 2024 earlier this month. That pricing has now reduced to about 100.
Investors also said that the violent but short-lived market sell-off was also a driver of aggressive rate-cutting calls, linked to the cancellation of large leveraged positions due to a sharp rise in the Japanese yen.
Although some Fed policymakers hinted that rate cuts are in the pipeline, most economists in an Aug. 14-19 Reuters poll did not expect a rapid series of rate cuts. The latest data, including last week's strong retail sales report, show the economy is performing well despite subdued inflation.
The US central bank will cut the federal funds rate by 25 basis points in September, November, and December to a range of 4.50%-4.75% by the end of 2024, according to 54% of those surveyed, 55 of 101.
The market, which had previously expected a half-percentage-point cut in September, is now pricing in around a 70% chance of a quarter-percentage-point cut next month.
More than a third, 34 of those surveyed, predicted two rate cuts this year and one respondent predicted only one rate cut. Eleven economists expect the Fed to cut rates by 100 basis points or more.
The unemployment rate is forecast to be around the current rate of 4.3% until 2026. Inflation is forecast to moderate only slightly over the next two years, based on the median forecast in the survey.
All measures of inflation studied, the Consumer Price index (CPI), core CPI, price index of personal consumption expenditures (PCE), and core PCE are expected to remain above 2% until at least 2026.
Despite the recent decline, wage growth remains above the 3.0%-3.5% range seen as consistent with the Fed's 2% inflation target.
The Fed is expected to deliver a 25 basis point reduction in each of the four quarters of 2025. Markets are currently pricing in around a 200 basis point reduction by the end of the third quarter of 2025.
The US economy grew 2.8% annually in the second quarter, much faster than the 2.0% expected by economists. Growth is seen in the survey as averaging 2.5% this year, faster than what Fed officials see as a non-inflationary growth rate of 1.8%.
Two-thirds of the usual contributors raised their 2024 growth projections from last month. The economy is expected to grow 1.8% next year.
Economists in the survey broadly expect the economy to expand at its trend growth rate at least until 2027. The median forecast from a smaller sample that provided views showed a recession chance of just 30%, a view that has not changed much since earlier this year.
Markets and economists will pay close attention to Fed Chairman Jerome Powell's statement on the economic outlook on Friday.
