The U.S. Federal Reserve will wait until the second quarter before cutting interest rates

The U.S. Federal Reserve will wait until the second quarter before cutting interest rates, per Reuters.

Read full article: https://www.reuters.com/markets/us/fed-cut-q2-probably-june-economists-less-dovish-than-markets-2024-01-23/#:~:text=BENGALURU%2C%20Jan%2023%20(Reuters),year%20than%20markets%20now%20expect.

A majority of economists surveyed by Reuters anticipate that the U.S. Federal Reserve will postpone interest rate cuts until the second quarter, with June considered more likely than May. The expectations for easing have reduced compared to market forecasts, with economists initially projecting the first rate cut around mid-2024. However, following Chair Jerome Powell's mention of a potential discussion on cuts, markets began pricing in a move in March. The recent shift in federal funds futures pricing now favors May, with a diminished chance of a move in March.

All 123 economists polled from January 16 to 23 predicted that the Federal Open Market Committee would maintain the fed funds rate at 5.25%-5.50% on January 31. While a majority of 86 respondents forecast rate cuts beginning in the next quarter, nearly 45% anticipate a June start, 31 project May, and only 16 foresee a cut in March. Some economists expect the Fed to initiate rate cuts in response to cooling inflation only in the second half of the year.

The survey results reveal alignment between economists and the Fed's own dot plot predictions, with the median forecast placing the fed funds rate at 4.25%-4.50% at year-end. Approximately 60%, or 72 out of 123, anticipate 100 basis points of cuts or less this year, in contrast to market expectations of over 125 basis points. The poll indicates that inflation, as measured by the personal consumption expenditure (PCE), will average around the central bank's 2% target in the second half of 2024, down from 2.6% in November.

Despite growth upgrades in the U.S. economy, economists see limited justification for early interest rate cuts, as the economy is expected to avoid a recession. The unemployment rate, currently at 3.7%, is forecasted to moderately increase to an average of 4.1% this year and the next.