Fed confirms prospect of three rate cuts in 2024

There Federal Reserve yesterday confirmed unchanged interest rates, signaling however that this year it will cut the cost of money three times, reducing it overall by 75 basis points. The cut, which had been expected since June, could even happen earlier, according to analysts’ new expectations.

What did the Fed decide?

The FOMC, monetary policy committee of the American central bank, left rates unchanged for the fifth consecutive time, confirming them in a range between 5.25% and 5.50%.

“Recent indicators suggest that economic activity is expanding at a solid rate. Inflation has slowed over the last year but remains high”, we read in the statement which underlines that the outlook remains “uncertain” and that the Fed “will continue to pay attention to inflation risks”.

From the dot plotthe table representing the preferences of the Board members, emerges that the central institute provides three rate cuts this year, for a total of 75 basis points.

For President Jerome Powell, the overall set of risks, positive and negative, on the achievement of monetary policy objectives “is moving towards a more balanced framework”, but “at the same time inflation remains too high and progress to lower it is not are insured.”

Powell added that Federal Reserve central bankers believe “it will probably be appropriate” to reduce dollar interest rates “at some point this year.”

The new economic forecasts

At this meeting, the Fed also updated its economic forecasts, revising them upwards and indicating that the GDP American economy will grow by 2.1% this year and then slow down to 2% in 2025 and 2026. The unemployment rate it is estimated at 4% this year and, increasing, to 4.1% in 2025, before returning to 4% in 2026.

As for the inflation it is expected to reach 2.4% in 2024, before falling to 2.2% in 2025 and 2% in 2026. The core inflation rate will be at 2.6% this year and then falls in 2025 and, in 2026.

What analysts expect

For Goldman Sachs progress in inflation and the labor market “will lead the Fed to begin its rate-cutting cycle this summer“. “Despite the recent setbacks on the inflation front, the main central banks continue to pursue rate cuts in the coming months and high-quality fixed income bonds they will benefit from it“, comments Whitney Watson, Co-Head and Co-CIO of Fixed Income and Liquidity Solutions at Goldman Sachs Asset Management.

Paolo Zanghieri, senior economist at Generali Investmentsnotes that “the FOMC has shown itself to be more tolerant towards inflationraising its forecasts for the current year” and “Powell implied that the Fed the pace of Quantitative Tightening will soon slow down, but this does not imply a higher equilibrium value for the stock of assets held.” “We maintain our view of three rate cuts this year, starting in June. – confirms the analyst – The markets welcomed the invariance of the 2024 point and the overall dovish tone of the meeting, with the S&P closing at a new high and the 2-year rate losing 10 basis points”.

Pictet AM underlines that “the FOMC has increased growth and inflation projections, but the midpoint for 2024 remained at three cuts. This data is indicative of the Fed’s reaction function and indicates a clear tendency to cut rates this year. Powell downplayed the recent rise in inflation, underlining that the Fed’s view of inflation falling on a bumpy road has not changed. He refrained from giving specific guidance on the start date or pace of the cuts, but reiterated that cuts are likely at some point this year.” “Our baseline hypothesis for the first cut is still June. – explains Xiao Cui, Senior Economist at Pictet – The risk to our Fed forecast of a start in June and cumulative cuts of 125 basis points is clearly linked to a later start and fewer cuts”.

For Tiffany Wilding, Managing Director and Economist of PIMCO,” updated projections show a Fed anything but intent to start the process normalization of rates in the coming months, but at the same time grappling with broader questions about inflation and the sensitivity of the U.S. economy to interest rates, which will determine the pace of cuts over the next year or two. “We continue to expect a benchmark of 75 basis points for cuts in 2024 starting in June – he explains – but we believe that short-term risks are oriented towards a lower number of cuts than currently expected by Fed officials”.