Fed to Cut Rates by 25 Basis Points at Next Two Meetings - Reuters Poll

The Federal Reserve is expected to cut interest rates by 25 basis points at each of its next two meetings, according to a majority of economists polled by Reuters. This decision comes amidst a backdrop of persistent inflation, robust economic growth, and evolving market expectations. The poll, conducted from September 6 to 10, 2024, reflects a strong consensus among economists regarding the Fed's impending rate cuts.

Inflation, which has been a key concern for the Fed, is expected to approach the central bank's 2% target in the coming months. The personal consumption expenditures (PCE) price index, the Fed's preferred measure of inflation, is forecast to average 2.2% in 2024 and 2.0% in 2025 and 2026. This moderation in inflation, coupled with signs of an economic slowdown, has led policymakers to signal that the time has come to begin reducing the federal funds rate.

Economic indicators, such as GDP growth and unemployment, have also played a role in shaping the Fed's rate cut decision. The U.S. economy is expected to expand at an annualized pace of 3.0% in the second quarter, with the unemployment rate remaining at around 4.2% through the end of 2026. These indicators suggest that the economy is performing well, but not at a pace that would necessitate a more aggressive rate cut.

Market expectations and financial conditions have also influenced the Fed's decision. Interest rate futures contracts briefly priced in more than a 50% chance of a half-percentage-point cut next week, but the chances have narrowed to about one in four. Rate markets are still pricing in more than 100 basis points of cuts this year, indicating a strong belief in the likelihood of additional rate cuts.

Geopolitical factors and global economic conditions have also contributed to the Fed's decision. Persistent inflation and strong U.S. economic data have forced markets to dramatically delay rate cut bets and slash 2024 rate cut pricing to roughly 50 basis points. Ten-year yields, which move inversely to price, have surged roughly 70 basis points from a recent low of 3.78% in late December back to 4.48% currently.

The poll results indicate that a majority of economists expect the Fed to cut rates by 25 basis points at each of its next two meetings. This decision reflects a balance between managing inflation, promoting economic growth, and responding to market expectations.

The chart above illustrates the projected path of inflation and GDP growth over the next few years. As inflation approaches the Fed's target and economic growth remains robust, the Fed is expected to adjust interest rates accordingly.

In conclusion, the Federal Reserve is poised to cut interest rates by 25 basis points at each of its next two meetings, as indicated by a majority of economists polled by Reuters. This decision is informed by a range of factors, including inflation, economic indicators, market expectations, and geopolitical conditions. As the economy continues to evolve, the Fed will remain vigilant in its efforts to promote maximum employment, stable prices, and moderate long-term interest rates.