Timing is everything when it comes to the federal funds rate. Economists are increasingly confident that the first rate cut since 2020 could happen as flowers are blooming in the late spring and early summer. This aligns with what Mortgage Bankers Association (MBA) Chief Economist Michael Fratantoni suggested during October Research’s 2024 Economic Forecast webinar in January.
Federal Reserve Chair Jerome Powell revealed he believes the financial markets are “in the right place” for a cut in the coming months while testifying before the Senate Banking Committee on March 7.
“We are waiting to become more confident that inflation is moving sustainably down to 2 percent,” Powell said. “When we do get that confidence, and we’re not far from it, it will be appropriate to begin to dial back the level of restriction so that we don’t drive the economy into recession.”
During the webinar, Fratantoni predicted a trio of cuts are likely throughout the year, with more to come in the two years to follow.
“Our forecast is three cuts this year, beginning in May, another four cuts in 2025 and a few cuts in 2026,” Fratantoni said. “And we’ll finish up this cycle with the Fed funds target between 2 ½ and 3 percent. That’s what the Fed controls directly.”
Fratantoni dug deep into the Fed’s logic behind rate increases in 2022 and 2023 and why mid-2024 could mark the right time to start reeling them back in.
“The question was, ‘Had they raised rates enough to bring inflation back down to the 2 percent target?’” Fratantoni said, adding that the Federal Open Markets Committee (FOMC) also would have to consider whether it could begin lowering rates without damaging the economy.
“There was uncertainty there, right up until that December [FOMC] meeting when Chair Powell said … they’re done. They’re at the peak. The next move is likely to be a cut,” Fratantoni added, noting other Fed officials confirmed Powell’s sentiment regarding rates at the time.
Powell referenced rates being at “peak” levels during his recent Senate testimony as well, before delving into what that could mean for monetary policy in the near term.
“We believe that our policy rate is likely at its peak for this tightening cycle,” Powell told lawmakers. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
However, as he has done consistently when discussing the question of rate reductions, Powell reiterated that the timing of any cuts will hinge on inflation activity and labor market conditions, among other relevant considerations.
“But the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured,” Powell said. “Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2 percent. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook, and the balance of risks. The committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
The majority of economists surveyed by Reuters since September 2023 have forecast a mid-2024 rate cut, provided market conditions support such a move. The latest survey results indicate they have only grown more convinced that all the necessary fiscal pieces are falling into place to make it a reality.
About two-thirds of the 108 economists surveyed in March predicted a June rate cut to be likely. By comparison, just over half of February respondents believed that would be the case.