The Fed is expected to cut interest rates by three quarter points before the end of the year, according to the latest Reuters poll of economists.
This represents a more aggressive approach than previously expected, with most participants now predicting a 25 basis point cut at each of the Fed’s remaining meetings in 2024.
The shift in sentiment came after a weaker-than-expected July employment report, which initially led rate futures traders to expect a cut of as much as 120 basis points through 2024. That estimate has since been trimmed to around 100 basis points.
Market dynamics also affected these estimates. The recent sell-off in the market was associated with the unwinding of large leveraged positions due to the sharp and sudden appreciation of the Japanese yen. This volatility contributed to more aggressive calls for rate cuts.
Despite some Fed officials hinting that rate cuts are coming, the majority of economists surveyed between Aug. 14 and 19 do not foresee a rapid series of rate cuts. Strong retail sales data released last week suggests the U.S. economy is still performing well, even as inflation shows signs of easing.
According to the survey, 54% of respondents expect the Fed to cut the federal rate by 25 basis points in September, November and December. That would bring the rate to a range of 4.50%-4.75% by year-end. In contrast, markets had previously priced in a 50 basis point cut in September but now see a 70% chance of a more modest quarter point cut next month.
Thirty-four of the economists surveyed expect two rate cuts this year, while one predicted just one. A minority of 11 respondents expect the Fed to cut rates by 100 basis points or more.
*This is not investment advice.