Fed’s Interest Rate Strategy
The U.S. central bank is expected to maintain high interest rates until at least July 2024, providing less relief than financial markets anticipate, according to a survey of leading academic economists conducted by the Financial Times. While the majority of those surveyed believe the Federal Reserve has ended its phase of raising rates, nearly two-thirds expect the central bank to begin cutting its benchmark rate only in the third quarter of 2024 or later. Additionally, three-quarters of the economists foresee a reduction in the federal funds rate by just half a percentage point or less next year.
Divergent Expectations and Economic Momentum
This cautious approach contrasts sharply with Wall Street’s expectations, where traders are betting on rate cuts starting as early as March 2024, potentially reducing the federal funds rate to around 4 percent by year’s end. The survey, conducted with the Kent A Clark Center for Global Markets at the University of Chicago Booth School of Business, highlights the differing views on the Fed’s ability to control inflation amid signs of an economic slowdown. James Hamilton, an economics professor at the University of California, San Diego, noted the economy’s sustained momentum, suggesting no immediate need for rate cuts.
Employment and Inflation Concerns
Robert Barbera, director of the Center for Financial Economics at Johns Hopkins University, emphasized that the Fed would require consistent improvements in inflation and a significant cooling in labor demand before considering rate cuts. The U.S. economy has added an average of 190,000 new jobs per month over the past five months, which is higher than necessary to absorb all new labor force entrants. Economist Laura Coroneo from the University of York expressed concerns about a tight labor market maintaining wage growth and the potential impact of an oil price shock due to Opec+ production cuts and geopolitical tensions.
Inflation and Economic Growth Projections
Most economists surveyed believe the Fed’s preferred inflation measure, the personal consumption expenditures price index excluding food and energy, will remain above 3 percent by December 2024, though they expect it to exceed the Fed’s 2 percent target. Their median estimate for the end of 2024 is 2.7 percent, down from 3.5 percent in October. The economists also predict that U.S. GDP growth, after adjusting for inflation, will be around 1.5 percent next year, significantly lower than this year’s pace.
Fed’s Quantitative Tightening and Recession Risks
In addition to maintaining high interest rates, the economists do not anticipate any immediate changes to the Fed’s plan to reduce its nearly $8 trillion balance sheet. Over 60 percent expect the Fed to continue its quantitative tightening program until at least the third quarter of 2024, aiming to cut up to $95 billion a month from its asset holdings. While most economists do not foresee a high likelihood of a recession next year, more than half believe there is at least a 50 percent chance of a recession beginning by the third quarter of 2025 or later.
Employment Outlook
The economists were divided on the future unemployment rate, with a slim majority predicting it could rise to 5 percent or higher over the next three years, while 46 percent expect it to remain below that level. Despite expectations of a sharp rise, the unemployment rate has only slightly increased to 3.9 percent over the past year.