The Federal Reserve will likely cut interest rates this week for the first time since March 2020 and give the strongest insight yet into just how much it plans to cut over the next year.
The Fed has kept rates steady within a target of 5.25% and 5.5% since July 2023 after aggressively hiking rates from near zero beginning in March 2022. On Sept. 18, the rate-setting Federal Open Market Committee (FOMC) is expected to announce that its "higher for longer" monetary policy has officially ended, and the Fed will cut its benchmark federal funds rate by 25 basis points (bps), bringing the lower level of its target range to 5%.
How much more the Fed will cut both before the end of this year and through 2025 will be revealed in the quarterly summary of economic projections, which details where Fed officials see rates, inflation, GDP and unemployment are all headed in coming years. The projections will be released after this week's meeting and will likely show a new median expectation of a federal funds rate below 4.75%, accounting for 75 bps worth of cuts before the end of 2024, said Satyam Panday, chief US economist at S&P Global Ratings.
"They are likely to have three cuts of 25 bps, one every meeting for the rest of the year, consistent with their macro forecasts and reaction function," said Panday.
In the June projections, the median view among Fed officials was that the benchmark interest rate would be 5.1% at the end of 2024, which means most of them expected only one 25-bps cut before the end of the year. This was down from March projections, which showed a median view of the rate at 4.6%, or three 25-bps cuts, by the end of 2024.
Yet much has changed over the past three months, as inflation has moderated and appears to be on the path toward the central bank's 2% goal. Additionally, unemployment has risen above 4% as hiring in one of the most robust jobs markets in a generation has slowed.
This new median view would align more with where most Fed officials saw rates headed both in March 2024 and December 2023. This reflects the preference of most Fed officials to start easing policy now as inflation is cooling and a recession in the US currently appears unlikely.
"Barring an exogenous shock or significant deterioration in the data, I think they'll take it slow," said Oren Klachkin, a financial market economist with Nationwide. "Their preference is for gradual policy implementation."
While the median expectation for Fed cuts this year is a total of 75 bps, some FOMC participants will likely project 100 bps of cuts or more, said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics.
In addition, the median estimates for inflation and unemployment will also be "marked to market." The personal consumption expenditures price index, which Fed's June median forecast had at 2.6%, increased 2.5% from July 2023 to July 2024, while the unemployment rate, which was 4% in the June economic projections, rose to 4.2% in August, according to the latest government data.
Fed Chairman Jerome Powell has often downplayed the significance of the Fed forecasts but will use September's projections to highlight the pervasive views among Fed officials, said Tang.
"Powell will likely lean on the [projections'] dot plot and macro projections to tell the main story: This is an FOMC that has turned the corner and is able and willing to use more or faster rate cuts to put a floor on the labor market, but there is no imminent recession risk," said Tang. "If inflation is normalizing, growth is fine, and the labor market looks like it could start to falter, then there is no good reason the FOMC should keep the policy rate so far above neutral for much longer."
Powell will also continue to stress the Fed's dependence on data and the totality of that data, not just a single report, as it crafts its policy plans, said Panday with Ratings.
Powell "may express that the committee wants to err on the side of caution given uncertainty around the risks surrounding employment mandate," Panday said. "He might also hint on his own personal preference - which, from my reading of his speeches, is that he wants to get to neutral sooner if inflation risks continue to stay in the back burner."