By Jamie McGeever
ORLANDO, Florida (Reuters) – The Federal Reserve is about to embark on an interest rate-cutting journey next year, but what is striking about the 150 basis points of easing markets now expect is the relatively smooth path to get there rather than the destination itself.
The history of policy cycles over the last 40 years shows that rates are often raised cautiously – the current inflation-busting campaign being the exception to the rule – but cut more quickly and aggressively.
Policymakers are usually wary of “breaking something” – asset markets, the labor market, the economy – when raising rates, and are probably all too aware that something may already be broken by the time they are actually cutting rates.
Of course, it is almost impossible to predict when a market, financial or economic shock might force the Fed to act boldly. But equally, it is hard to imagine the looming easing cycle will resemble the 25 basis points-per-meeting from March to December currently outlined by market pricing.
That’s more reminiscent of the Alan Greenspan Fed’s “measured pace” rate hikes of 25 bps-per-meeting in the mid-2000s, or the 2016-18 tightening cycle of 25 bps every second meeting.
The rate cuts that followed in 2007-08 and 2019-20, respectively, were anything but measured.
That’s not to suggest another Global Financial Crisis or pandemic-led shutdown of the global economy is on the horizon. And although inflation continues to fall and inch closer to the Fed’s 2% goal, the last mile is proving to be the hardest.
Indeed, Fed officials still don’t see inflation hitting 2% until 2026, although it will get mighty close in 2025, according to their revised projections released on Wednesday.
What markets seized on most, however, was the Fed’s new 2024 median outlook for the fed funds rate of 4.6%, down 50 basis points from three months ago.
Looked at another way, Fed officials have moved even further – their new end-2024 median forecast is a full 100 basis points lower than September’s end-2023 projection of 5.6%.
Eric Winograd, director of developed market research at AllianceBernstein, notes that the Fed’s new “dot plots” imply rates will be cut 75 basis points next year, then roughly by around 25 basis points per quarter through 2025 and 2026 until the long-run neutral level of 2.5% is reached.
“That’s a smooth, gradual glide path to equilibrium; the sort of path that central banks always aim at but rarely hit,” Winograd reckons. “It is unlikely that the economy will decelerate as smoothly and painlessly as the Fed’s forecasts imply.”
The fed funds target range is currently 5.35-5.50%, so it is worth noting that monetary policy would still be “restrictive” if rates are cut by 75 bps or even 150 bps, given that the Fed’s long-run “neutral” rate that neither stimulates nor slows growth or inflation is 2.5%.
In his press conference, Fed Chair Jerome Powell refused to be drawn on the timing of any rate cuts, and insisted November’s presidential election will not influence the Fed in its actions.
Analysts at TD Securities still expect the easing cycle to begin in June, although risks clearly point to the starting gun being fired earlier. Yet they predict 200 bps of cuts in 2024 as the economy tips into recession.
Their total rate cut forecast for the year isn’t materially different from the 150 bps that rates futures are currently indicating. But the timing and size of the anticipated moves are, and much more in line with previous easing cycles.
Once rate cuts start, moves of 50 bps or more are pretty common. The most obvious exception was the mid-1990s, when the economy managed that elusive “soft landing” and the Fed’s three rate cuts were only a quarter point each.
What Powell and his colleagues wouldn’t give for a repeat.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Edmund Klamann)