Most economists expect the Federal Reserve to cut interest rates three times this year, with a low probability of an economic recession

According to a survey by the Zhitong Finance and Economics APP, most economists expect the Federal Reserve to cut interest rates by 25 basis points at each of the remaining three meetings in 2024. This forecast has been increased compared to last month, reflecting a reassessment of the economic outlook. However, economists generally believe that the likelihood of a recession in the United States is low.

The adjustment in the rate cut expectations is related to the weaker-than-expected US employment data in July, prompting interest rate futures traders to lower the expected rate cuts for 2024 from the previous 120 basis points to around 100 basis points. Additionally, despite a brief period of intense selling in the market, investors did not call for a significant rate cut, partly due to forced liquidation of leveraged positions triggered by the appreciation of the Japanese yen.

Although some Federal Reserve officials hinted at an upcoming rate cut, according to a survey conducted from August 14th to 19th, most economists believe that the Fed will not act quickly. Recent data, including strong retail sales reports, indicate a strong performance of the US economy, despite some easing in inflation.

Among the 101 economists surveyed, 54% of respondents (55 people) expect the Fed to cut rates by 25 basis points at the meetings in September, November, and December, with the federal funds rate range expected to fall to 4.50%-4.75% by the end of 2024. While the market once predicted a significant 50 basis point rate cut in September, the current probability of a 25 basis point rate cut next month is around 70%.

At the same time, more than a third of respondents (34 people) expect the Fed to cut rates twice this year, while one economist believes there will be only one rate cut. Eleven economists predict that the rate cuts this year will amount to 100 basis points or more.

Jonathan Millar, Senior US Economist at Barclays Bank, pointed out that the main reason for the rate cut is the decline in inflation, which does not necessarily mean a slowdown in economic activity. He believes that the US economy remains strong, with growth rates close to trend levels, and therefore expects inflation to gradually decline.

He added, "The current labor market conditions are good, although cooling down gradually, it is unlikely to show significant weakness. The unemployment rate may rise slightly, but there is no reason for the Fed to panic."

The survey predicts that by 2026, the unemployment rate will remain around the current 4.3%. The median forecast indicates that the inflation rate will only slightly ease in the next two years.

Despite a slowdown in wage growth, it remains within the range of 3.0%-3.5%, in line with the Fed's 2% inflation target. It is expected that the Fed will cut rates by 25 basis points each quarter in 2025, and the market expects the total rate cut by the end of the third quarter of 2025 to be around 200 basis points.

Low Risk of Economic Recession

In the second quarter of this year, the US economy grew by 2.8% quarter-on-quarter, far exceeding economists' expectations of 2.0%. According to the survey, the average growth rate of the US economy in 2024 is expected to be 2.5%, higher than the current forecast of non-inflationary growth rate of 1.8% by Fed officials. In addition, two-thirds of respondents have raised their expectations for economic growth in 2024, expecting a growth rate of 1.8% The survey results also show that economists generally believe that the US economy will continue to grow at a near-trend pace at least until 2027. The median forecast from a small sample shows that the possibility of an economic recession is only 30%, a expectation that has remained relatively stable since the beginning of the year.

Michael Gapen, Chief Economist at Bank of America, said, "We do not believe that the recent slowdown in economic activity will lead to a significant rate cut by the Federal Reserve."

He also pointed out, "The July employment report may have errors due to weather reasons, failing to accurately reflect the actual conditions of the labor market and the economy. We hope that future data will confirm this."

This Friday, the Kansas City Fed will hold its annual economic symposium in Jackson Hole, Wyoming, where market participants and economists will closely watch Federal Reserve Chairman Jerome Powell's speech to discuss the future economic outlook