Economists are divided on how many interest rate cuts Federal Reserve officials will signal in 2024 when they meet next week, following a recent surge in inflation measures.
Policy makers are likely to back away from their long-held prediction of three rate cuts this year, but it's still unclear whether they'll schedule two rate cuts: Forty-one percent of economists in a Bloomberg survey expect the “dot plot” to show two rate cuts, while 41% see just one or no cuts.
The Federal Open Market Committee, which has kept interest rates at their highest level in 20 years since last July, plans to gradually cut rates this year, encouraged by a sharp decline in inflation in the second half of 2023. But a lack of progress in early 2024 has postponed those plans.
“The Fed is waiting for a series of data that will strengthen its confidence that inflation is on a sustained path toward its 2 percent target,” Ryan Sweet, chief U.S. economist at Oxford Economics, said in a survey response. “The balance of risks to inflation expectations remains tilted to the upside.”
Officials are almost certain to keep rates steady in the 5.25% to 5.5% range for a seventh consecutive meeting next week. Chairman Jerome Powell and his colleagues are scheduled to update their economic and interest rate outlooks for the first time since March when they meet June 11-12.
Smaller cuts would mean a delay in starting the cuts, which could have implications for the presidential election in November, but Fed officials have consistently said the decision is based solely on economic considerations.
Fed watchers expect the first rate cut to come at the central bank's September policy meeting, the last before voters head to the polls on Nov. 5. They also expect policymakers to slightly raise their inflation forecast for 2024 while reiterating their forecast for annualized U.S. GDP growth of 2.1 percent and an unemployment rate of 4 percent at the end of the year.
The poll was conducted among 43 economists from May 31 to June 5.
A majority of those surveyed said the Fed would cut rates because of falling inflation, not a labor market shortage or economic shock. None of the economists said the next rate hike was very likely, although officials such as Minneapolis Fed President Neel Kashkari have occasionally mentioned it as a possibility.
Many Fed leaders have suggested in recent weeks that they are in no rush to cut rates because inflation is more stable and the growth outlook is stronger. The Fed's preferred measure of inflation was 2.7% in the 12 months through April, but economists expect relatively little progress toward the central bank's 2% target in the second half of this year compared with lower monthly readings in the second half of 2023.
Before the self-imposed quiet period, Fed President Christopher Waller said the central bank could consider cutting interest rates “later this year,” a view echoed by Atlanta Fed President Raphael Bostic. Cleveland Fed President Loretta Mester said she hopes to see “a few more months of data that look like inflation is coming down,” while Boston Fed President Susan Collins said “patience is really key.”
Nearly all respondents expect the Fed to maintain its May 1 guidance that a rate cut would not be appropriate until there is greater confidence that inflation is sustainably trending toward 2 percent. Economists are divided on how the FOMC will assess inflation, with most expecting the committee to repeat its recent lack of progress.
“The FOMC will likely say there has been some encouraging data but more evidence is needed for confidence to return,” said Luke Tilley, chief economist at Wilmington Trust.
On the second day of its meeting next week, the government will release its consumer price index for May. While the Fed is keeping an eye on a different price index, the CPI is expected to show continued subdued inflation.
“The CPI number will likely influence the FOMC's stance,” said Stephanie Ross, chief economist at Wolfe Research. “We expect a moderate reading, but a reading below 0.30% could be seen as further evidence of slowing inflation.”
Fed staff have been predicting a soft landing for the economy since last July, and economists themselves have become increasingly optimistic about the growth outlook: Just 3% of respondents now expect a recession in the next 12 months, well below the 58% who said so last July.
Fed officials have been vague about what specific economic data would trigger a rate cut, but 60% of economists say three consecutive positive core inflation readings would be a key catalyst. Inflation numbers for the first three months of the year disappoint, and economists say the same number of positive readings would trigger a rate cut.
Moreover, “clear evidence of a labor market slowdown” could prompt a rate cut, said Elisabeth Kopelman, U.S. economist at Scandinavian Bank.
The government's May jobs report, released Friday, painted a mixed picture on the state of the labor market, with employment and wage growth accelerating but the unemployment rate rising and the labor force participation rate falling.
Traders believe the employment data will likely delay the timing of any rate cuts overall, and expect about 1.5 quarter-point cuts this year, according to futures trading.
