The Federal Reserve (US central bank) will cut its key interest rate in September and again this year, according to a majority of forecasters in a Reuters poll. Economists polled by Reuters over the past few months have remained consistent in expecting two cuts, in contrast to the markets that were until this week. Last price was one reduction in November, before going back to two reductions.
The shift in federal funds futures bets is partly because official data showed that the US economy expanded at a slower pace in the fourth quarter than previously estimated, even as key inflation measures remained steady.
But over the past few months, Fed officials have made clear they are in no rush to cut interest rates. Some economists believe the Fed's latest quarterly forecast, due this month, will show two or fewer rate cuts for this year, down from the very close call of three cuts in March.
However, nearly two-thirds of economists, 74 of 116, in a May 31-June 5 Reuters poll expected the first cut in the federal funds rate to the 5.00%-5.25% range to be in September. This was the same result as last month's poll, with a similar majority.
Only five expect a cut in July, and none expect a cut at the June 11-12 policy meeting.
“They (the Federal Reserve) are in a good position in terms of the amount of constraints that monetary policy is currently putting on the economy,” said Oscar Munoz, chief US 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 holds up but also returns to normal and inflation continues to come down, they will start to ease. It's more about calibrating policy, not really moving policy toward a more restrictive policy." Or a less restrictive position.”
About 60% of respondents to the latest poll, 68 out of 116, expected a quarter-point cut this year, broadly unchanged from last month's poll.
A large minority of 28% of economists, 33 of 116, have seen only one rate cut this year or none at all and only 15 expect more than two.
Inflation, especially the Fed's personal consumption expenditures (PCE) price index of 2%, remained high. Taken together with very low unemployment rates, this makes an early rate cut by the Fed highly unlikely.
None of the inflation measures — the Consumer Price Index (CPI), core CPI, PCE, and core PCE — were expected to reach 2% until at least 2026, according to the median forecast in the survey.
Economists expect the unemployment rate to remain near the current level of 3.9% at least through 2027, indicating continued tightness in the labor market. The US economy, which grew at an annual rate of 1.3% in the first quarter, is expected to grow by 2.4% this year. That's faster than what Fed officials currently consider a non-inflationary growth rate of 1.8%.
