Experts: Federal Reserve Likely to Reduce US Rates in June, With Risks Pointing to Delayed Action
According to a recent survey by Reuters, a modest majority of economists anticipate that the U.S. Federal Reserve will lower the federal funds rate in June. The prevailing concern among these experts is that the initial rate cut may be postponed rather than accelerated.
For months now, Reuters surveys have consistently indicated that the first rate cut is expected around the middle of the year. However, market sentiment has shifted from March to May, with June now being the favored timeframe for the initial rate reduction.
Despite stock markets reaching all-time highs, the has climbed nearly 50 basis points to 4.28% this month, following multiple data releases highlighting robust growth, a tight labor market, and lingering inflation concerns.
Out of 104 economists surveyed by Reuters between February 14-20, 86 predict that the Fed will initiate the rate cut in the next quarter, mirroring the sentiments from earlier surveys. Among these experts, 53 anticipate that the most probable meeting for the rate cut will be in June, with an additional 33 suggesting May as a potential timeframe. The remainder foresee the rate reduction taking place in the latter half of 2024, ruling out any possibility of a rate cut in March.
Over the past month, several key figures within the Federal Reserve, including Chair Jerome Powell, have emphasized the importance of ensuring a sustained downward trend in inflation before implementing rate cuts. The current inflation rate remains above the Fed’s 2% target, warranting caution in any rate adjustment decisions.
Notably, analysts are increasingly convinced that the Fed is committed to avoiding a repeat of the “transitory” inflation error witnessed in 2021. Kevin Cummins, chief U.S. economist at NatWest Markets, has revised his projections for the first rate cut from May to June, citing unexpectedly resilient economic growth as a contributing factor.
Cummins emphasizes that the Fed’s resolve to not overlook inflation trends is influenced by previous experiences and a desire to navigate the economic landscape more effectively. The forecasted personal consumption expenditure (PCE) inflation is projected to hover around 2% after the Fed commences rate cuts.
While PCE inflation is expected to stabilize, other inflation metrics such as the consumer price index (CPI) and core CPI are forecasted to remain above target until 2026. This indicates that the Federal Reserve is likely to proceed cautiously with rate adjustments even after the initial cut.
The U.S. economy, which recorded a better-than-expected quarterly growth rate of 3.3%, is anticipated to expand by an average of 2.1% this year, surpassing the non-inflationary growth rate identified by Fed officials.