Fed signalled just one cut in 2024, but does anyone really believe that?

Rates decision was expected but slower pace of cuts is questioned by some

Fed signalled just one cut in 2024, but does anyone really believe that?
Steve Randall

The Federal Reserve decided to hold interest rates steady at its latest FOMC meeting this week, but the surprise was its signals on what may happen next.

Markets had been expecting as many as four cuts in the second half of 2024, supported by the strength of the U.S. economy but also the general trend in core inflation and consumer prices, albeit still above the target range.

However, the Fed’s chair Jerome Powell noted that the economic outlook is uncertain, and the central bank is attentive to inflation risks. He reiterated that The Fed aims to restore price stability, essential for long-term employment and stable prices.

“We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. So far this year, the data have not given us that greater confidence,” he said. “The most recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward our inflation objective. We will need to see more good data to bolster our confidence that inflation is moving sustainably toward 2 percent.”

While it seems that policymakers are expecting to make only one cut of 25 basis points in 2024, down from the three being signalled in March, markets are pricing in at least two. Looking ahead to 2025 and 2026 there could be four cuts in each year.

Canadian perspective

However, RBC Economics’ economist Claire Fan believes the Fed will remain cautious and we will have to be patient for the single 2024 rate cut.

“We see the outcome of [Wednesday’s] meeting as broadly in line with our expectations and maintain the view that ongoing easing in inflation and gradual cooling in labour markets will persist, prompting the Fed to make a first rate cut later this year in December,” she said.

But Desjardin’s principal economist, Francis Généreux, thinks there could be an additional cut this year.

“Despite recent encouraging figures, inflation is still high and a presidential election campaign is underway, so we clearly shouldn't expect this year's rate cut to land before the last meetings of the year,” he said. “Powell and the other Fed officials want to see several more months of weaker inflation. They also want to have greater confidence that the labour market and the economy won't accelerate too quickly. Since our own forecasts assume that US economic growth will be somewhat more modest than the Fed anticipates, we still think there's room for the Fed to cut rates twice this year.”

And Ali Jaffrey at CIBC Economics highlights the Fed’s prudence in managing the speed and timing of rate cuts.

“Overall, the Fed is just watching the data and erring on the side of caution for now. That is absolutely not a bad plan, but it is also not a hard commitment. The more important point from their perspective is that, even with some bumps along the way, monetary policy is working and an easing cycle is needed. They will let the data decide when we start the cycle, but the route is becoming clearer,” he said.