We Expect the Fed to Cut Rates 5 Times This Year

The
Fed
kept
the
rate
unchanged
at
its
March
meeting,

which
had
been
widely
predicted
over
the
past
two
months.
At
its
prior
meeting,
chair
Jerome
Powell
threw
cold
water
on
the
notion
of
March
rate
cuts,
especially
given
the
surprising
uptick
in
inflation
in
January
and
February.

The
federal
funds
rate
currently
stands
at
a
target
range
of
5.25%-5.50%,
following
500
basis
points
in
hikes
implemented
from
March
2022
to
July
2023,
the
largest
increase
in
four
decades.

The
federal
funds
rate
is
well
into
“restrictive
territory”
as
assessed
by
the
Fed,
meaning
rates
are
above
normal
levels,
designed
to
cool
economic
activity
and
reduce
inflation.
Once
inflation
is
back
at
the
central
bank’s
2.0%
target,
the
rate
should
be
made
closer
to
“neutral”
longer-run
levels,
which
Federal
Open
Market
Committee
members
currently
assess
at
around
2.6%.

US
Inflation
on
the
Right
Track

In
2023,
inflation
made
great
progress
toward
returning
to
normal.
Inflation
averaged
6.5%
in
2022
(using
the
PCE
price
index),
the
highest
level
since
1981,
but
dropped
to
3.7%
in
2023.
In
the
second
half
of
2023,
inflation
averaged
a
2.1%
annual
rate,
with
core
inflation
at
1.9%.

However,

the
first
two
months
of
2024
have
brought
a
rebound,
with
core
PCE
inflation
averaging
about
a
4%
annualised
rate.
Essentially
no
one
expects
inflation
to
remain
this
high
for
the
rest
of
the
year.
Still,
this
uptick
could
signal
that
inflation
may
return
to
the
Fed’s
2%
target
more
slowly
than
forecasters
anticipated
several
months
ago.

For
its
part,
the
Fed
has
nudged
its
latest
inflation
projections
slightly
upward,
now
expecting
fourth-quarter
2024
core
PCE
inflation
at
2.6%
year-over-year
(from
2.4%
in
its
prior
projection).
It’s
also
raised
its
expectation
of
gross
domestic
product
growth
in
2024.
The
median
FOMC
member
expects
three
federal-funds
rate
cuts
in
2024,
unchanged
from
its
prior
projections,
despite
the
uptick
in
inflation.

The
Fed
has
been
more
even-keeled
than
the
market
when
assessing
inflation’s
underlying
trend.
Powell
noted
that
FOMC
members
were
keen
not
to
overreact
to
positive
inflation
readings
in
the
second
half
of
2023,
just
as
they
are
not
overreacting
to
the
poor
data
from
January
and
February.
He
said
the
“overall
story
hasn’t
changed
…
inflation
is
moving
down
gradually
on
a
sometimes-bumpy
road
toward
2%.”

We
expect
inflation
for
the
rest
of
2024
to
be
slightly
lower
than
the
Fed
anticipates,
owing
to
softening
economic
growth
and
a
continued
deflationary
impulse
on
goods
from
supply
chain
improvement.
We
expect
core
PCE
inflation
to
post
at
2.2%
year
over
year
by
the
fourth
quarter
of
2024
(below
the
Fed’s
2.6%).
This
underpins
our
view
that
the
Fed
will
enact
five
rate
cuts
this
year,
bringing
the
federal-funds
rate
down
to
a
4.00%-4.25%
target
range
at
year-end.

Federal
Reserve
to
Cut
Rates
Aggressively

Moreover,
we
expect
the
federal
funds
rate
to
fall
to
2.25%-2.50%
by
year-end
2025,
significantly
below
the
Fed’s
projection
of
3.75%-4.00%,
as
seen
in
the
dot
plot
of
FOMC
forecasts.
We
expect
inflation
in
2025
to
average
slightly
below
the
Fed’s
2.0%
target
at
1.6%,
while
the
Fed
still
expects
average
inflation
of
2.3%
in
2025.

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