Economists Divided on Federal Reserve’s Interest Rate Cuts Amid Inflation Surge

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Economists are split on how many interest-rate cuts the Federal Reserve will signal for 2024, following recent inflation increases. Discover the latest projections and expert insights on the Fed’s policy decisions and their potential impact on the economy and upcoming presidential election.

Economists are debating the number of interest-rate cuts that Federal Reserve officials will signal for 2024 during their upcoming policy meeting, especially after a recent surge in inflation figures.

Policymakers may retreat from their long-held forecast of three rate cuts this year. It’s uncertain whether they will still project two cuts. According to a Bloomberg survey, 41% of economists expect the “dot plot” to show two cuts, while another 41% predict one or no cuts at all.

The Federal Open Market Committee, which has kept its benchmark rate at a two-decade high since last July, was initially encouraged by a significant drop in inflation in the latter half of 2023, prompting them to plan a gradual rate reduction for this year. However, these plans have been delayed due to insufficient progress in early 2024.

“The Fed is waiting for a string of data that strengthens its confidence that inflation is on a sustained path toward its 2% target,” said Ryan Sweet, chief US economist at Oxford Economics, in a survey response. “The balance of risks to our forecast for inflation are still weighted to the upside.”

It is almost certain that officials will keep the rate steady in the 5.25% to 5.5% range for a seventh consecutive meeting next week. Chair Jerome Powell and his colleagues will update their economic and rate projections at the June 11-12 meeting for the first time since March.

Fewer cuts would indicate a later start to reductions, potentially affecting the presidential election in November, although Fed officials consistently state their decisions are based solely on economic considerations.

Fed watchers anticipate the first cut at the central bank’s September policy meeting, the final gathering before the November 5 election. They also expect policymakers to slightly raise their 2024 inflation estimates while maintaining their forecasts for US gross domestic product growth at 2.1% annually and a year-end unemployment rate of 4%.

A Bloomberg survey of 43 economists, conducted from May 31 to June 5, revealed that the majority expect the Fed to cut rates in response to lower inflation rather than labor market issues or economic shocks. None of the economists foresee a higher rate move, an outcome occasionally mentioned by officials such as Minneapolis Fed chief Neel Kashkari.

Several Fed leaders have recently suggested no urgency to cut rates, given persistent inflation and a solid growth outlook. Inflation, by the Fed’s preferred measure, was 2.7% through April, and economists expect minimal progress toward the 2% goal in the latter half of the year compared to low monthly figures in late 2023.

Before a self-imposed quiet period, Fed Governor Christopher Waller mentioned that the central bank might consider lowering rates “at the end of this year,” a sentiment echoed by Atlanta Fed President Raphael Bostic. Cleveland Fed chief Loretta Mester stated she wants to see “a few more months of inflation data that looks like it’s coming down,” while Boston Fed’s Susan Collins emphasized that “patience really matters.”

Most respondents expect the Fed to maintain its May 1 guidance that no reduction would be appropriate until there is more confidence that inflation is moving sustainably toward 2%. Economists are divided on how the FOMC will characterize inflation, with many expecting the committee to note the recent lack of progress.

“The FOMC is likely to say there has been some encouraging data, but that it needs to see more evidence for confidence to return,” said Luke Tilley, chief economist at Wilmington Trust.

On the second day of next week’s meeting, the government will report the May consumer price index. While the Fed focuses on a separate measure of prices, the CPI is expected to show continued cooling of inflation.

“The CPI print is likely to impact the tone of the FOMC,” said Stephanie Roth, chief economist at Wolfe Research. “While we expect a tame print, a number below 0.30% could be seen as further evidence of slowing inflation.”

The Fed staff has forecasted a soft landing for the economy since last July. Economists have become more optimistic about growth, with only 3% forecasting a recession in the next 12 months, down from 58% last July.

Although Fed leaders have been vague about the specific metrics that would prompt a rate cut, 60% of economists believe an important catalyst would be three consecutive positive core inflation reports. Disappointing inflation figures from January to March mean an equal number of positive reports would set the stage for a rate cut.

Additionally, “clear evidence of a slowdown in the labor market” might prompt rate cuts, said Elisabet Kopelman, US economist for Skandinaviska Enskilda Banken AB.

The government’s May jobs report, released Friday, showed mixed results for the labor market. While payroll and wage growth accelerated, the unemployment rate increased and labor force participation fell.

Traders interpreted the jobs data as likely to delay the timing of rate cuts, now anticipating about 1.5 quarter-point reductions this year, according to futures contracts.

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