Next year's interest rate cut does not equal the “easing” cycle! Economists' consensus deviates from the market: the Fed will “stay on hold” until July

Zhitong Finance ·  12/07/2023 21:41

According to institutional surveys, economists generally expect the Fed to keep interest rates unchanged until at least July next year, later than previously anticipated.

Zhitong Finance learned that institutional surveys show that economists generally expect the Fed to keep interest rates unchanged until at least July next year, later than previously anticipated. Most economists say that the first interest rate cut will be to adjust real interest rates, not to launch a stimulus plan. Out of 102 analysts surveyed from December 1 to 6, all but 5 said that the Fed has ended this round of interest rate hikes, even though Fed Chairman Powell said last week that policymakers are “ready to further tighten policies under appropriate circumstances.”

The current debate has turned to how long the federal funds rate will remain in the current 5.25%-5.50% range, and how many times interest rates will be cut next year. The survey shows that next year's interest rate cut will be much lower than the market's current expectations. Despite the recent strong US economic growth and inflation above target levels, the market expects interest rates to be cut by about 150 basis points next year, and interest rates will be cut as early as March. This is in stark contrast to the “longer period of higher interest rates” rhetoric a few weeks ago.

However, economists are not convinced that the Fed will start cutting interest rates so soon. 52 out of 102 economists expect the Fed to cut interest rates until at least July next year. Out of 102 forecasters, 72 (nearly three-quarters) expect interest rates to be cut by 100 basis points or less next year. The proportion of observers who expect the Fed to cut interest rates sometime in the first half of next year has been steadily declining in recent months. The proportion in September was over 70%, contrary to market expectations.

Andrew Hollenhorst, Citi's chief US economist, said: “We agree that the Fed will cut interest rates in 2024, but we think the market has underestimated the extent to which stubbornly high inflation will delay interest rate cuts until economic activity slows down more clearly.”

The market has changed drastically. The yield on 10-year US Treasury bonds fell sharply in the past month after breaking through 5% in October. The S&P 500 index has risen more than 19% since this year, and November was the best performing month since July 2022.

Hollenhorst said, “We expect higher core inflation to break the narrative of falling inflation... We expect the Federal Open Market Committee (FOMC) to begin cutting interest rates in the third quarter of next year. Even if we are wrong, inflation remains weak, and as long as economic activity continues, the Commission may seize the opportunity and wait for stronger evidence that inflation has continued to slow, thereby increasing its own credibility.”

All of the inflation indicators covered in the survey — consumer price index (CPI), core CPI, personal consumption expenditure (PCE) price index, and core PCE price index — are expected to gradually decline, but remain above the Fed's 2% inflation target until at least 2025.

However, as price pressure declines, inflation-adjusted interest rates — that is, real interest rates — will become more restrictive and may cause excessive economic slowdown if they remain the same. 26 out of 38 respondents answered another question. More than two-thirds of respondents said that adjusting real interest rates would prompt the Fed to cut interest rates for the first time, rather than cutting interest rates in order to shift to stimulating the economy.

After the US achieved strong annualized GDP growth of 5.2% in the third quarter, it is expected that this quarter will lose its growth momentum. The growth rate is expected to be 1.2%, and the average growth rate for 2024 is expected to be 1.2%. Despite this, in the most aggressive austerity cycle in 40 years, the US economy performed well in interest rate hikes of 525 basis points. It is expected that it will continue to add thousands of jobs, maintain low unemployment and high price pressure.

Ellen Zentner, chief US economist at Morgan Stanley, warned against calling next year's interest rate cut an easing cycle. She said, “As the current policy stance 'becomes more balanced', the Fed's courage to keep its policy unchanged will be challenged. But when the Federal Reserve began cutting interest rates in 2024, it was maintaining a certain degree of restraint by following the decline in inflation... Cutting interest rates and easing is not just a semantic difference; it is an important difference.”


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