"Next March vs Earliest July" Diverging US Pivot Forecasts... "Caution Against Optimism"

'Economists Survey on "Timing of US Interest Rate Cut" Forecast
63% of Economists Say "After Q3 Next Year"
Economic Momentum Still Strong... Temperature Gap with Market
Financial Conditions Rapidly Ease on Rate Cut Expectations
Optimism May Actually Delay Pivot Timing'

Market and economists' forecasts diverge on the timing of the Federal Reserve's (Fed) first interest rate cut next year. While the market is increasingly optimistic about a rate cut in March next year, many economists believe the Fed will pivot only in the second half of next year at the earliest. Some warn that excessive optimism spreading in the market could ease financial conditions and actually delay the timing of the rate cut.

On the 8th, the Kent A. Clark Global Market Center at the University of Chicago Booth School of Business conducted a survey of 40 economists from the 1st to the 4th of this month. The results showed that 63% of respondents expected the Fed to cut rates in the third quarter of next year or later.

Among the respondents, 33% predicted the rate cut would occur in the third quarter of next year. Fifteen percent expected it in the fourth quarter of next year, and another 15% forecasted it for 2025 or later. Only 38% (5% in the first quarter, 33% in the second quarter) anticipated a rate cut in the first half of next year.

These expectations differ from Wall Street forecasts, which see the Fed's first rate cut happening in the first half of next year. Futures markets anticipate the Fed will begin cutting rates as early as March next year, lowering the current 5.25-5.5% rate to 4% by the end of next year.

There is also a significant gap between Wall Street and economists regarding the magnitude of the Fed's rate cuts next year. Among the economists surveyed, 35% expected a 0.5 percentage point cut, the largest share. This was followed by 25% expecting a 0.25 percentage point cut, and 15% expecting rates to remain unchanged. Overall, 75% of respondents anticipated the annual rate cut to be within 0.5 percentage points. Ten percent each expected a 0.75 percentage point or 1 percentage point cut, while only 3% predicted a 1.25 percentage point cut. In contrast, Bloomberg Economics, a research institute under Bloomberg, expects a 1.25 percentage point cut, and Swiss bank UBS forecasts a cut of up to 2.75 percentage points.

Economists believe the Fed will only cut rates after confirming a sustained slowdown in inflation and a significant cooling of the labor market. James Hamilton, an economics professor at the University of California, San Diego, explained, "There is still considerable momentum in the economy, so it is judged that there is no immediate need for the Fed to lower rates," adding, "The Fed also seems not to have such intentions."

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed) [Image source=Yonhap News]

There is also a sense of caution that investors' optimism about rate cuts is excessive. If the market preemptively prices in the possibility of rate cuts, easing financial conditions and increasing inflationary pressures, the Fed may extend its tight monetary policy for a longer period.

As this analysis suggests, financial conditions are already easing rapidly. The yield on the 10-year U.S. Treasury note fell from 4.92% at the end of October to 4.15% as of the 8th, a drop of more than 0.7 percentage points in just over a month. Goldman Sachs' U.S. Financial Conditions Index declined by nearly 1 percentage point last month due to a sharp rise in stock prices, falling bond yields, and a weaker dollar. This is the largest monthly drop in 40 years.

Mohamed El-Erian, Chief Economic Advisor at Allianz Group, said, "A similar scenario unfolded a year ago, but rate cuts did not materialize this year," adding, "The more investors ignore signals from the world's most influential central bank, the more likely they are to lose this debate." He emphasized, "Interest rates may remain unchanged for longer than futures markets currently expect, and investors should prepare for rate hikes and stock market corrections next year to avoid further downside risks."

This content was produced with the assistance of AI translation services.