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

The U.S. Federal Reserve is expected to cut its key interest rate in September and once more this year, according to a majority of forecasters in a Reuters poll. However, there remains a significant risk that they might opt for only one cut or none at all.

Economists surveyed by Reuters over the past few months have consistently predicted two cuts, unlike the markets, which until last week were pricing in one cut in November before reverting to two. This shift in fed funds futures bets was partly due to official data showing that the U.S. economy expanded at a slower pace last quarter than previously estimated, even as key inflation measures remained stubbornly high.

Fed officials have indicated over the past few months that they are in no rush to cut the policy rate. Some economists believe the Fed's latest quarterly "dot plot" projection, due this month, will show two or fewer rate cuts for this year, down from a very close call of three in March.

Nearly two-thirds of economists, 74 out 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, the same conclusion as last month's poll. Only five expect a July cut, down from 11 in the May survey, and none predicted a reduction at the June 11-12 policy meeting.

"They (the Fed) are in a good place in terms of the amount of restriction monetary policy is currently exerting on the economy," said Oscar Munoz, chief U.S. macro strategist at TD Securities, who expects cuts in September and December. "They don't want to overdo it either. So, as long as the economy is holding up but also normalizing and inflation continues to drop, then they start easing. It's more the calibration of policies, not really moving policy to a more restrictive or less restrictive stance."

Around 60% of participants in the latest poll, 68 out of 116, predicted two quarter-point cuts this year, broadly unchanged from last month's survey. A sizeable minority of economists, 33 out of 116, saw only one rate cut this year or none. Only 15 expect more than two cuts. Among 21 primary dealers polled, 10 expected the Fed to reduce rates only once or not at all in 2024.

Inflation, particularly the personal consumption expenditures (PCE) price index, which the Fed targets at 2%, has remained elevated. Combined with very low unemployment, this 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 - are 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 labor 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 labor market doesn't look all that weak to me right now," Gapen added.

Economists predicted the unemployment rate to remain closely around the current 3.9% at least until 2027, indicating persistent tightness in the labor market. The U.S. economy, which grew at a 1.3% annualized pace in the first quarter, is forecast to expand by 2.4% this year, faster than what Fed officials currently see as the non-inflationary growth rate of 1.8%.