Economists lower US inflation expectations and raise unemployment rate expectations, providing support for the Fed's interest rate cuts

The latest monthly survey of economists by the media shows that economists have lowered their inflation forecasts for the first half of 2025 in the United States, and expect a slight increase in the unemployment rate. Analysts believe that these forecasts are likely to prompt the Federal Reserve to start cutting interest rates.

Specifically, based on a survey of more than 70 economists in mid-July, they expect:

• The core PCE, which is the most important inflation measure for the Federal Reserve and excludes volatile food and energy prices, is expected to increase by 2.6% year-on-year by the end of 2024, lower than the 2.7% forecast from the previous month.
• Overall PCE is expected to increase by 2.4% year-on-year by the end of the year, also lower than the previous month's forecast of 2.6%.
• Economists also predict that the average unemployment rate in the fourth quarter of this year will be 4.2%, higher than the previous expectation of 4.1%.

The economists' latest forecasts align with the trends reflected in a series of recent data. Recent data reports have shown that the Fed's tightening actions are having the expected impact on the U.S. economy. This includes a general decline in inflation last month, as well as a slowdown in hiring and wage growth, indicating a cooling of the U.S. economy, which is what Fed officials want to see in order to take rate-cutting actions.

Economists believe that there is a 30% chance of a U.S. economic recession in the next 12 months, a probability much lower than their forecast from a year ago. They believe that with support from healthy consumer spending and resilient investment, U.S. economic growth can continue until 2025, although quarterly economic growth is expected to be less than 2%.

Some economists point out that the Fed is likely to start cutting interest rates in September unless there is unfavorable inflation data in July or August. Monetary policy easing is necessary as the U.S. labor market is showing signs of slowing down, and lowering rates helps prevent more widespread and deeper cracks in the labor market.

Optimists believe that the U.S. economy is resilient and this situation is likely to continue for many years, as the U.S. economy has returned to the "golden-haired girl" era.

It is worth noting that the current performance of the U.S. economy seems to be more in line with the views of those calling for rate cuts, indicating a clear cooling of the country's economy. In its latest research report, JP Morgan mentioned: How far is the U.S. from a recession? The current level of the U.S. unemployment rate is "one step away" from triggering the closely watched Sam rule, while at the same time, another recession indicator, the Dudley rule, has been triggered.

According to the rule frequently cited by former New York Fed President Dudley to measure economic recessions, when the 3-month moving average of the unemployment rate is at least 0.3 percentage points higher than the low point during the expansion period, the U.S. economy will enter a recession within 6 months.

On the same Friday, the third most important figure at the Federal Reserve, New York Fed President Williams, stated that the Fed is committed to achieving the 2% inflation target, with officials being very clear about this. The long-term trend of a low neutral interest rate remains intact. Future actions will be defined by more severe and more frequent shocks Williams is a heavyweight among Federal Reserve officials who spoke last before the July meeting. The Federal Reserve will hold the FOMC policy meeting on July 30th to 31st, with a blackout period before the meeting