1 in 2 US Economists Predict Fed to Cut Interest Rates Three Times This Year

"Hawkish Kashikari Also Says 'Rate Cut Appropriate in September'"

One in two American economists forecast that the Federal Reserve (Fed) will cut interest rates by 0.25 percentage points three times this year.

On the 19th (local time), Reuters reported that out of 101 economists surveyed from the 14th to the 19th, 55 believed the Fed would lower interest rates by 0.25% each in September, November, and December. If this happens, the total rate cut by the end of this year would be 0.75 percentage points.

[Image source=Reuters Yonhap News]

About one-third of respondents, 34 economists, expected the Fed to cut rates twice this year. Only one respondent said the Fed would cut rates once. Eleven predicted a rate cut of more than 1 percentage point.

Initially, the dominant expectation was that the Fed would take a 'big step' by cutting rates by 0.5 percentage points in September, but the current market highly values the possibility of a 'baby step' with a 0.25 percentage point cut. Earlier this month, when the U.S. Department of Labor released the July employment report showing the unemployment rate soaring to 4.3%, concerns about a recession rapidly spread in the market, causing stock markets worldwide, including the U.S., to plummet. This led to calls for a big step rate cut in September.

According to the Chicago Mercantile Exchange (CME) FedWatch on the same day, the federal funds futures market reflects a 75.5% probability that the Fed will cut rates by 0.25 percentage points in September. The possibility of a 0.5 percentage point cut, which surged to the 80% range earlier this month due to recession fears, is currently at 24.5%.

Neel Kashkari, president of the Minneapolis Federal Reserve Bank and considered a hawk (favoring monetary tightening) within the Fed, hinted at the possibility of a rate cut in September in an interview with the Wall Street Journal (WSJ) on the same day. He stated, "Since the balance of risks has shifted from inflation to the labor market, discussions about the possibility of a rate cut in September are appropriate." Kashkari had said in June that rate cuts might not be necessary by the end of the year, indicating a change in his stance.

However, he emphasized that there is no reason to cut rates by more than 0.25 percentage points because the layoff rate remains low and unemployment claims have not significantly worsened.

Jonathan Miller, chief U.S. economist at Barclays, said, "The main reason for cutting rates is that inflation is falling. It is not just that the economy is slowing down." He added, "We are seeing a fairly resilient economy growing close to trend, and inflation will gradually decrease accordingly." He also said, "The labor market is holding up well," and "It is gradually cooling but I do not think it will really weaken."

According to the survey, the unemployment rate is expected to remain at the current 4.3% level until 2026. Inflation is also expected to slightly ease over the next two years. Experts forecast that key inflation-related indicators such as the Consumer Price Index (CPI), core CPI, Personal Consumption Expenditures (PCE) price index, and core PCE will remain above 2% until 2026.

The possibility of a U.S. recession is considered low. The U.S. economic growth rate (annualized quarter-on-quarter) recorded 2.8% in the second quarter (flash estimate), which is steeper than the 2% expected by economists. According to the survey, economists forecast an average growth rate of 2.5% for this year. About two-thirds of respondents have raised their economic growth outlook for this year compared to last month.

Michael Gapen, chief U.S. economist at Bank of America (BoA), said, "We are not convinced that a recession is imminent enough for the Fed to significantly cut rates." He added, "The July employment report was negatively affected by weather and may have given false signals about the labor market and economy," and said, "We are looking forward to subsequent data to verify this."

Goldman Sachs also lowered the probability of a U.S. recession from 25% to 20% on the 17th. Goldman Sachs had raised the recession probability from 15% to 25% after the July employment report was released on the 2nd but has now lowered it again.

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