Fed to cut in Q2, probably June; economists less dovish than markets- Reuters poll

By Indradip Ghosh and Prerana Bhat

BENGALURU (Reuters) – The U.S. Federal Reserve will wait until the second quarter before cutting interest rates, according to a majority of economists polled by Reuters, with June seen more likely than May and less easing forecast this year than markets now expect.

Since September, economists have broadly expected the first rate cut around mid-2024, but since last month’s Fed meeting markets began pricing in a move in March after Chair Jerome Powell said that a discussion of cuts was coming “into view”.

Only a few days ago, federal funds futures pricing for the first cut shifted to May after at one point markets gave a 90% chance of a move in March, as most recent data and Fed officials’ comments cooled early rate cut expectations.

While all 123 economists polled by Reuters from Jan. 16 to 23 predicted the Federal Open Market Committee would leave the fed funds rate at 5.25%-5.50% on Jan. 31, a majority of 86 respondents said rate cuts would start next quarter.

Out of those, nearly 45%, or 55 economists bet on a June start, while 31 said May. Only 16 saw a cut in March. The rest forecast the Fed would start cutting rates in response to cooling inflation only in the second half of the year.

In the previous poll conducted before the FOMC met in December a slight majority of 51% saw no rate cut in the first half of 2024.

“We still expect the Committee to maintain a cautious stance in the near term even amid an increasingly improving profile for consumer prices, as the Fed would like to ascertain that the recent progress in inflation is sustainable,” said Oscar Munoz, chief U.S. macro strategist at TD Securities.

Economists were almost evenly split on the risks to their forecasts. While 24 of 45 respondents said the risk was the cut might come later than they expect the rest said earlier.

The survey results also show economists much more aligned with the Fed’s own dot plot predictions than markets.

The median forecast puts the fed funds rate at 4.25%-4.50% at year-end, the same as last month. Nearly 60%, or 72 of 123, predicted 100 basis points of cuts or less this year, less than current market expectations of over 125 basis points, already reduced from 150 just a week ago.

Inflation as measured by personal consumption expenditure (PCE) – the Fed’s preferred gauge – will average around the central bank’s 2% target in the second half of 2024, down from 2.6% in November, the poll showed.

But other inflation measures – the consumer price index (CPI), core CPI, and core PCE – were still seen above 2% at least until 2026.

Out of 41 economists who answered an additional question, 30 saw low risk of a significant resurgence in inflation over the coming six months, while 11 judged such risk as high.

The U.S. economy, which grew at a 4.9% annualized pace in the third quarter, is expected to have expanded 2.0% last quarter, with growth seen averaging 1.4% this year, both representing upgrades from December poll predictions.

As it appears increasingly likely the U.S. economy will avoid a recession, economists see little justification for early interest rate cuts.

“The minutes of the December meeting suggest that there has not been an elaborate discussion of the cutting cycle yet,” said Philip Marey, senior U.S. strategist at Rabobank. “Unless the FOMC is concerned about a recession, we expect the first rate cut in June.”

The unemployment rate, currently at 3.7%, was expected to pick up only mildly to average 4.1% this year and next.

(For other stories from the Reuters global economic poll:)

(Reporting by Indradip Ghosh and Prerana Bhat; Polling by Anitta Sunil and Purujit Arun; Editing by Ross Finley and Tomasz Janowski)