Where Interest Rates Are Likely Headed
Economists are coalescing around a simple outlook for the Federal Reserve’s coming policy meetings: a series of quarter-point reductions. The prevailing view is that the Fed will trim interest rates by 25 basis points at each of the three remaining meetings this year. That call comes from a recent survey in which only a small group anticipated a bolder move, such as a 50-basis-point cut.
Evidence the Economy Is Cooling
Inflation has been sliding closer to the Fed’s 2% target, and a run of softer data points to a decelerating economy. Against that backdrop, the Fed has signaled it’s prepared to start lowering rates—a notable shift after holding its policy rate between 5.25% and 5.50% since mid-2023. The change in tone reflects a desire to balance progress on inflation with support for growth.
How Markets Responded to Recent Data
A recent jobs report delivered a mixed message on the labor market and briefly shook interest rate futures. For a moment, traders penciled in higher odds of a half-percentage-point cut. Those expectations faded quickly as markets reverted to a more measured view, again leaning toward smaller, incremental moves.
What the September Poll Shows
In a poll conducted from September 6 to 10, 92 of 101 economists said they expect a 25-basis-point cut at the U.S. central bank’s Federal Open Market Committee meeting next week. Many, including Stephen Stanley, chief U.S. economist at Santander, argue that the latest jobs figures don’t justify dramatic easing and instead support a cautious approach.
How Expectations for the Rest of the Year Have Shifted
Forecasts have been recalibrated. A growing number of economists now anticipate multiple rate cuts this year, with additional moves in November and December on the table. The total expected easing has increased, signaling a meaningful change in sentiment among analysts following the latest data.
What Primary Dealers Are Saying
Primary dealers—firms that trade directly with the Fed—mostly see the same trajectory. Many expect a cumulative 75 basis points of cuts before year-end. Even so, they describe economic growth as resilient and note it could run a bit hotter than the non-inflationary pace the Fed aims for, at least for a while.
Inflation and Growth: The Baseline Path
On inflation, the Personal Consumption Expenditures (PCE) price index—the Fed’s preferred gauge—is expected to settle near 2% by early next year. Unemployment, meanwhile, is projected to hover around 4.2% until late 2026. Together, those paths suggest the economy retains considerable underlying strength even as policy begins to ease.
Why Cut If the Economy Still Looks Solid?
One view, shared by several analysts, is that lowering rates now is less about rescuing a weak economy and more about reducing monetary restraint as inflation moves toward target. In other words, the goal is to keep policy aligned with the evolving backdrop rather than to shock the system with outsized cuts.
Recession Risk and the Bigger Picture
Markets remain uneasy about the possibility of a downturn, but the median estimated probability of recession sits at 30%. That figure has been relatively steady. It’s consistent with forecasts that envision continued growth, a dynamic that reflects confidence in the recovery’s staying power after recent economic disruptions.
Frequently Asked Questions
What size rate cut do most economists expect next?
The majority expect a 25-basis-point reduction at the Federal Open Market Committee meeting next week, with similar quarter-point moves favored for the remaining meetings this year.
Have forecasts shifted toward more easing in 2024?
Yes. Many have moved from expecting a single cut to penciling in multiple cuts this year, with additional reductions in November and December increasingly seen as likely.
What’s driving the Fed’s tilt toward cuts?
Inflation is edging closer to the 2% target while growth indicators show some cooling. That combination has prompted policymakers to consider easing policy after holding rates between 5.25% and 5.50% since mid-2023.
How are primary dealers and markets viewing the outlook?
Primary dealers broadly anticipate a total of 75 basis points in cuts this year. Markets briefly priced in a larger move after a recent jobs report, then quickly reverted to expecting smaller steps.
What does this mean for the broader economy?
Baseline projections point to inflation stabilizing near 2% by early next year and unemployment around 4.2% until late 2026. Growth is expected to run at or above a sustainable 1.8% pace over the next few years, with recession risk near a 30% median probability.
