Economist: The Federal Reserve will only cut interest rates by 25 basis points in September, and will not significantly cut rates for the rest of the year

According to a Reuters survey, most economists expect the Federal Reserve to cut interest rates by 25 basis points at each of the remaining three policy meetings in 2024. Only 9 economists (out of 101) expect the Fed to cut rates by 50 basis points next week.

With inflation nearing the Fed's 2% target and some signs of economic slowdown, policymakers have clearly stated that now is the time to start lowering the federal funds rate. The federal funds rate has been held in the range of 5.25%-5.50% since July 2023.

After the mixed August employment report released last Friday, interest rate futures contracts briefly priced in a probability of over 50% for a 50 basis point rate cut by the Fed next week, but this probability has now dropped to about one-fourth. The rate market still expects the Fed to cut rates by over 100 basis points this year.

In speeches made by New York Fed President Williams and Fed Governor Waller late last week, there was also no indication that policymakers support a significant rate cut this month.

In a survey conducted from September 6th to 10th, the vast majority of economists (92) expect the Federal Open Market Committee (FOMC) to cut rates by 25 basis points at the end of the two-day meeting next week.

Stephen Stanley, Chief U.S. Economist at Santander Bank, stated, "The employment report was soft, but not a disaster. Last Friday, Williams and Waller did not provide clear guidance on whether the urgent question of a 25 or 50 basis point rate cut on September 18th, but they both gave relatively optimistic assessments of the economy, which in my view, strongly indicates that the Fed will cut rates by 25 basis points."

Among 71 surveyed economists, 54 believe that a 50 basis point rate cut by the Fed at the remaining meetings this year is unlikely, with 5 considering it very unlikely. Additionally, 13 think it is possible, with 4 considering it very likely.

Aditya Bhave, Senior U.S. Economist at Bank of America, said, "If the Fed cuts rates by 50 basis points in September, we believe the market will see it as an acknowledgment that the Fed is behind the curve and needs to adopt an accommodative stance, rather than just returning to neutral."

Since May, most economists surveyed by Reuters have been calling for two rate cuts by the Fed this year, but this number rose to three times last month.

Some economists believe that reducing borrowing costs is not aimed at addressing economic weakness, but as inflation approaches the 2% target, the Fed should ease policy constraints.

In the latest survey, economists see only a 30% average probability of the U.S. entering an economic recession, a figure that has remained relatively unchanged this year despite recent concerns in financial markets about a possible economic contraction.

Out of 95 economists, 65 expect the Fed to cut rates by 25 basis points twice in November and December after next week's meeting This figure is higher than the 55 in the previous month.

Among the 19 major traders surveyed, 11 expect the Federal Reserve to cut interest rates by a total of 75 basis points this year.

The median forecast in the survey shows that the U.S. economy will grow by 3.0% annually in the second quarter, and is expected to expand in the coming years at a pace equal to or exceeding the 1.8% non-inflationary growth rate currently considered by Federal Reserve officials.

Economists expect the unemployment rate to remain around the current 4.2% until the end of 2026, and project that the Federal Reserve's favored inflation gauge - the PCE price index - will reach the Fed's 2% target in the first quarter of 2025