Most economists expect the Federal Reserve to cut interest rates three times this year!

According to the latest survey of economists by foreign media, most economists expect the Federal Reserve to cut interest rates by 25 basis points at each of the remaining three meetings in 2024, a larger rate cut than predicted last month. However, they also indicate that the likelihood of the United States falling into an economic recession is very low.

The shift in economists' expectations for Fed rate cuts comes against the backdrop of weaker-than-expected US non-farm payroll data in July, prompting rate futures traders to predict a rate cut of up to 120 basis points earlier this month, a forecast that has now fallen to around 100 basis points.

Investors also note that a significant but short-lived sell-off in the market is another driving factor behind the aggressive rate cut expectations, which is related to a large-scale unwinding of leveraged positions due to a sudden sharp rise in the yen.

Although some Fed officials have hinted at rate cuts, most economists participating in the foreign media survey from August 14 to 19 did not expect the Fed to cut rates quickly. Recent data, including strong retail sales data last week, indicate that despite a slight decline in inflation, the economy is performing relatively well.

54% (55 out of 101 respondents) predict that the Fed will cut the federal funds rate by 25 basis points in September, November, and December, bringing the rate range to 4.50% to 4.75% by the end of 2024.

Over a third (34 out of 55 respondents) expect the Fed to cut rates twice this year, with one respondent predicting only one rate cut by the central bank. 11 economists expect the Fed to cut rates by 100 basis points or more this year.

Jonathan Millar, senior economist at Barclays US, said, "Our basis for the Fed's rate cut is mainly because inflation is declining, not because economic activity is slowing down... We see the economy as quite resilient, growing at a pace close to trend, in which case we believe inflation will only gradually decline."

He added, "The labor market is performing well. It is cooling gradually, but we do not expect to see a real substantive weakness. The unemployment rate may rise slightly by around 10 basis points from its current level. They (the Fed) have no reason to panic."

The unemployment rate is expected to remain around the current 4.3% level until 2026. According to the median forecast from the survey, inflation is expected to slightly decrease over the next two years. However, economists expect all inflation indicators, including CPI, core CPI, PCE, and core PCE, to remain above 2% at least until 2026.

Despite recent declines, wage growth remains above the range of 3.0% to 3.5%, which is considered consistent with the Fed's 2% inflation target.

For the Fed's rate cuts next year, economists expect the Fed to cut rates by 25 basis points in each of the four quarters of 2025. The market currently expects the Fed to cut rates by about 200 basis points by the end of the third quarter of 2025

Low Probability of Economic Recession

The US GDP growth rate in the second quarter was 2.8%, far exceeding economists' expectations of 2%. Surveys predict that the average GDP growth rate in the US this year will be 2.5%, higher than the 1.8% non-inflationary growth rate currently recognized by Federal Reserve officials.

Two-thirds of respondents have raised their expectations for US economic growth in 2024, forecasting a growth of 1.8% next year.

Economists surveyed generally expect that the US economy will expand at a pace close to its trend growth rate at least until 2027. The median forecast from a small sample providing viewpoints shows that the probability of an economic recession is only 30%—a prospect that has not changed much since the beginning of this year.

Michael Gape, Chief US Economist at Bank of America, stated, " We do not believe that the economy is on the verge of a downturn, prompting the Federal Reserve to significantly cut interest rates."

He added, "There are reasons to believe that the July non-farm employment report was affected by the weather, making it a false signal about the labor market and economic conditions. We believe that subsequent data will confirm this view."