Fed to cut rates by 25 basis points on Sept. 18, twice more in 2024

(This Sept. 10 story has been corrected to show the number of respondents who said “likely” and “very likely”, in paragraph 8)

By Indradip Ghosh

BENGALURU (Reuters) – The Federal Reserve will lower interest rates by 25 basis points at each of the U.S. central bank’s three remaining policy meetings in 2024, according to a majority of economists in a Reuters poll that found only nine of 101 expected a half-percentage-point cut next week.

With inflation approaching the Fed’s 2% target and some signs of an economic slowdown, policymakers have made it clear “the time has come” to start reducing the federal funds rate, which has been held in the 5.25%-5.50% range since July 2023.

After the release on Friday of a mixed jobs report for August, 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.

Remarks from New York Fed President John Williams and Fed Governor Christopher Waller late last week also did not signal any support among policymakers for an outsized rate cut this month.

A strong majority of economists in the Sept. 6-10 poll, 92 of 101, expect a 25-basis-point cut when the U.S. central bank’s Federal Open Market Committee (FOMC) concludes its two-day meeting next week. 

“The employment report was soft but not disastrous. On Friday, both Williams and Waller failed to offer explicit guidance on the pressing question of 25 basis points vs. 50 on Sept. 18, but both offered a relatively benign assessment of the economy, which points strongly, in my view, to a 25-basis-point cut,” said Stephen Stanley, chief U.S. economist at Santander (BME:SAN).

Among primary dealers surveyed, Santander has provided the most consistent end-year rate forecast throughout 2024, predicting 50 basis points of cuts in total in each Reuters poll up until July, when it switched to 75 basis points.

Fifty-four of 71 economists polled said a 50-basis-point cut at any of the Fed’s remaining meetings this year was unlikely, including five who said it was very unlikely. Thirteen said such a move was likely and four said very likely.

“If the Fed were to cut by 50 bp in September, we think markets would take that as an admission it is behind the curve and needs to move to an accommodative stance, not just get back to neutral,” said Aditya Bhave, senior U.S. economist at Bank of America.

A majority of economists polled by Reuters since May have been calling for two Fed rate cuts this year, but the number increased to three last month.

Some economists have argued the reductions in borrowing costs will be aimed not at responding to an ailing economy, but instead to reduce the amount of policy restriction as inflation falls toward the Fed’s target.

ECONOMIC EXPANSION

The median probability of a recession in the latest poll was just 30%, a figure little changed all year, despite recent concerns in financial markets about a possible economic contraction.

After its meeting next week, the Fed will deliver two more 25-basis-point rate cuts this year – in November and December – according to 65 of 95 economists. That was up from 55 of 101 last month.

Among 19 primary dealers polled, 11 expected the Fed to deliver a total of 75 basis points of rate cuts this year.

The U.S. economy, which grew at an annualized pace of 3.0% in the second quarter, is expected to expand at or faster than what Fed officials currently see as the non-inflationary growth rate of 1.8% over the coming years, according to median forecasts in the poll.

The unemployment rate was forecast to remain at around the current 4.2% through the end of 2026. Personal consumption expenditures (PCE) price index inflation – the Fed’s preferred gauge – was expected to hit the 2% target in the first quarter of 2025.  

(Other stories from the Reuters global economic poll)