Fed Pencils In 3 Rate Cuts in 2024

Fed officials have emphasized the projections are not a predetermined plan, and that the individual forecasts are subject to change based on incoming data for inflation and the labor market. A key measure of consumer prices has risen more than economists expected the past two months, while the US unemployment rate has edged up to a two-year high that officials still regard as low.

Policymakers also lifted slightly their forecasts for where they see rates settling over the long term, boosting their median estimate to 2.6% from 2.5%, following speculation from economists that higher rates may persist in the post-pandemic environment. The change implies rates will need to stay higher for longer in the future.

Policymakers updated their projections for inflation and economic growth for 2024, raising their forecast for underlying inflation to 2.6% from 2.4%, and boosting the growth forecast to 2.1% from 1.4%. They also lowered their unemployment rate projection slightly, to 4% from 4.1%, for 2024.

Rate Pivot

Following a series of lower-than-expected inflation readings in the second half of 2023, Fed officials had pivoted to discussing the timing and pace of interest-rate reductions. But a pickup in key price gauges at the start of the year has muddled the picture.

Powell told lawmakers this month the central bank is getting close to the confidence it needs to start lowering interest rates, saying they were “not far” from the level of confidence needed on inflation.

At the same time, he and other Fed officials have said there is no rush to make cuts with the economy on sound footing. Governor Christopher Waller, in a February speech, said it was “appropriate to be patient, careful, methodical, deliberative” with the economy solid and inflation above the central bank’s target.

In addition to its economic impact, the Fed’s rate path has been closely watched for its potential political impact during a presidential election year. Powell and other Fed officials have stressed the Fed is nonpartisan and makes its calls independent of politics, though rate cuts that boost the US economy could be seen to being helpful to President Joe Biden’s electoral chances.

Federal Reserve Chairman Jerome Powell. Credit: Bloomberg