After holding interest rates steady since July 2023, the U.S. Federal Reserve is expected to cut rates perhaps as early as June 2024. That move will most likely come in response to easing inflation.
Currently, a majority of Fed policymakers see two or three cuts coming in 2024. That’s based on the Summary of Economic Projections from the Fed’s March 19-20 meeting. Other forecasts broadly concur, but this will depend to some extent upcoming inflation figures, and to a lesser extent, labor market data.
Remaining Fed Meeting Dates In 2024
After the conclusion of its first two meetings of the year, the Fed has six remaining meetings in 2024. However, the Federal Open Market Committee can adjust interest rates whenever it chooses, typically in the event of major economic shocks. Scheduled FOMC decisions will come on the following dates in 2024: May 1; June 12; July 31; September 18; November 7; and December 18.
Rate Expectations
The FOMC releases its own expectations for key economic variables in the Summary of Economic Projections at alternate Fed meetings. For the March 20 forecast, nine policymakers saw three interest rate cuts before the end of 2024. Five policymakers expected two cuts. The remaining five saw a range of outcomes from no move in interest rates to four cuts. This is a slightly more hawkish change from the December 2023 forecast, when four more policymakers forecast four cuts and one estimated six cuts. Since then, early 2024 inflation data has been less encouraging, but that may not become a trend.
The CME FedWatch Tool, which uses fixed income pricing to forecast Fed decisions, is slightly more dovish than Fed forecasts. This model sees a range of outcomes spanning one to five interest rate cuts in 2024, with three or four rate cuts most likely. On this assessment, interest rate cuts are likely to start in June. Similarly, event forecasting site Kalshi currently gives a 70% chance of a Fed rate cut by June.
Inflation Forecasts
The median FOMC policymaker expectation is for the headline Personal Consumption Expenditures Price index to show a 2.4% annual inflation rate for December and PCE inflation excluding food and energy to be 2.6%. That’s not too different from the most recent report, with annual PCE inflation to January 2024 coming in at 2.4% and 2.8%, respectively.
The Fed’s Perspective
Fed Chair Jerome Powell stated that, “we got really good inflation data in the second part of last year” at his March 20 press conference. “Again, we didn’t overreact to it. We said we needed to see more and we said it would be bumpy.”
However, Powell discussed elevated monthly inflation in January and February and said he didn’t think that those readings added to anyone’s confidence that we’re moving closer to the Fed’s 2% inflation target. Powell also said of the relatively high January inflation numbers: “There could be seasonal effects there but we don’t want to be too dismissive of it.”
Fed policymakers have, so far, chosen to wait for inflation to move closer to their 2% goal before cutting interest rates. There’s also some optimism that lower housing costs could move inflation lower, as Powell stated. “I think there’s some confidence that the market rents, lower market rent increases that we’re seeing will show up in measures of housing services inflation over time,” he said on Wednesday.
What To Expect
Assuming inflation does continue to move lower from here, most forecasts anticipate that the FOMC will start to cut interest rates by the summer. Between two and four cuts will come in 2024 on current estimates, with three cuts perhaps the most likely outcome.
Even if progress on inflation were more limited, it is unlikely that the Fed would increase rates, since Powell stated the following: “We believe that our policy rate is likely at its peak for this tightening cycle.” That’s also something he’s repeated at recent meetings. But rate cuts could take longer, or be smaller than currently expected if inflation’s trajectory is less encouraging.
The jobs market is also a minor risk. If unemployment were to weaken from current levels, then the Fed may be prompted to cut rates sooner or more aggressively, though Powell mentioned that “the labor market, it’s in good shape.” “We follow all the possible stories that are out there about there being cracks but the overall picture really is, [a] strong labor market,” he added. So far, that labor market strength has enabled the Fed to be patient in assessing rate cuts.
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