Rate Relief on the Horizon: How Deep Will the Fed’s Interest Rate Cuts Go
Fed Interest Rate Decision: Experts Weigh In on Expected Cuts
The US Federal Reserve is set to make a crucial decision on interest rates, which will have a significant impact on the global financial landscape. A recent CNBC survey reveals that experts expect the Fed to cut interest rates less than the market anticipates.
The Fed’s interest rate decision comes after a series of rate hikes, with 10 more increases expected to occur by July 2023. This will result in the Fed’s main interest rate being 5 percentage points higher than when it started. Most experts (84% of 27 economists and fund managers) predict a 0.25 percentage point cut, while only 16% expect a larger cut of 0.5 percentage points.
Fed Chairman Jerome Powell’s leadership will play a crucial role in shaping the interest rate decision. Experts forecast the Fed’s interest rate to be 4.6% by the end of this year and 3.7% by the end of 2025. In contrast, the futures market predicts lower rates, at 4.1% this year and 2.8% in 2025.
Market Expectations vs. Expert Forecasts
Market expectations for the Fed to cut interest rates eight times in six meetings are considered too high by some experts. John Donaldson, an expert at Haverford Trust Co., notes that the Fed’s signals about its plans have been clear, making the market’s expectations seem overly optimistic.
The Economy’s “Soft Landing”
The survey reveals a split among experts on whether the Fed will cut rates by 0.25 percentage points or 0.5 percentage points. However, most experts (74%) believe that a September rate cut would be timely enough to ensure a soft landing for the economy. This optimism is reflected in the growth outlook, which remains at 2% this year and eases to 1.7% in 2025.
Michael Englund from Action Economics comments, “The economy is growing faster than expected in 2024, giving the Fed time to cut rates at a moderate pace.” Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, adds, “Despite the economic risks ahead, the Fed’s upcoming rate cut will be closer to the ‘mid-cycle adjustment’ trend seen in 1995, 1997, and 2019 than the late-cycle recession trend.”
However, not all experts share this optimism. Diane Swonk, chief economist at KPMG US, notes, “Powell’s legacy depends on how soft he lands after leaving it too late to raise rates in 2021.” Neil Dutta of Renaissance Macro Research also cautions that there are real risks if the Fed cuts rates by only 0.25 points.
Stock Market Forecasts
The median forecast sees the S&P 500 rising this year and falling to 5,546 by year’s end, slightly below its current level. The median forecast puts the S&P at 5,806 by the end of next year, or just 3% from its current level.