Fed to Cut Rates Twice this Year, but One or None Still a Risk

  • The U.S. Federal Reserve will cut its key interest rate in September and once more this year, according to a majority of forecasters in a Reuters poll that also showed a significant risk the Fed opt for only one or none at all.
  • Economists in Reuters surveys over the past few months have remained consistent in predicting two cuts, unlike markets, which until last week were pricing in one in November before flipping back to two. That shift in fed funds futures bets was partly because official data showed the U.S. economy expanded at a slower pace last quarter than estimated earlier, even as key inflation measures remained sticky.
  • However, inflation, and particularly the personal consumption expenditures (PCE) price index, which the Fed targets at 2.0%, has remained elevated. Taken together with very low unemployment, that makes an early Fed rate cut very unlikely. None of the measures of inflation - the Consumer Price Index (CPI), core CPI, PCE, and core PCE - were expected to reach 2% until at least 2026, according to median forecasts in the poll.
  • "The Fed will be raising its inflation forecast at the June meeting and...it would look odd to raise your inflation forecast and then cut rates quickly after that," said Michael Gapen, chief U.S. economist at Bank of America, who expects just one cut this year, in December. "Our baseline is the economy remains resilient but growth is softening on the margin. The labour market is cooling on the margin. So, the next move is a cut. But I think the primary risk to our baseline is the Fed just doesn't cut...and the labour market doesn't look all that weak to me right now," Gapen added.
  • Still, nearly two-thirds of economists, 74 of 116, in the May 31-June 5 Reuters poll predicted the first cut in the fed funds rate to a 5.00%-5.25% range would come in September. Around 60.0% of participants in the latest poll, 68 of 116, predicted two quarter-point cuts this year, broadly unchanged from last month's survey. A sizeable 28.0% minority of economists, 33 of 116, saw only one rate cut this year or none.

(Source: Reuters)