Federal Reserve Likely to Cut Interest Rates Multiple Times in Next Year
The Federal Reserve is expected to cut interest rates multiple times in the coming year, starting in September and extending through July 2025, according to a new report from Citi Research.
A Slowing Economy
Citi analysts pointed to fresh signs of a slowing economy, including the Institute for Supply Management’s service-sector gauge, which suddenly fell into negative territory, and the monthly jobs report, which showed unemployment rising to 4.1%. This slowdown has raised the risk of a sharper decline in economic activity and faster rate cuts.
First Rate Cut in September?
The data and dovish comments from Fed Chair Jerome Powell suggest that the first rate cut will likely occur in September. "A continued softening of activity will provoke cuts at each of the subsequent seven Fed meetings, in our base case," the report predicts.
Eight Rate Cuts in the Next Year
Citi analysts are predicting eight rate cuts, with each cut totaling 25 basis points. This would result in a 200-basis-point reduction in the benchmark rate, from its current range of 5.25%-5.5% to 3.25%-3.5%. The rate cuts would start in September and continue through July 2025.
Economic Slowing
The economy has slowed down from its rapid pace in 2023, with inflation resuming its slowdown after showing some unexpected stickiness. However, Citi analysts noted that the economic slowdown is not enough to trigger a recession, but it’s enough to justify rate cuts to prevent a recession.
Labor Market Data
The labor market report showed a 206,000-job gain in the headline payroll report, which is a solid number. However, the report also showed a 49,000-job decline in temporary services, which is typically seen during recessions.
The Sahm Rule
The Sahm Rule, a recession indicator, could be triggered in August if unemployment continues to rise at its current pace.
Citi Analyst’s Views
Citi analysts, led by chief U.S. economist Andrew Hollenhorst, have a dimmer view of the economy and have been warning of a hard landing. Hollenhorst has consistently predicted that the U.S. economy is headed for a hard landing, despite the Wall Street consensus shifting to a soft landing.
Implications for the Economy
If the economy does indeed experience a recession, it could lead to political consensus for more government spending to stimulate the economy. However, if the recession is mild, this consensus may not materialize.
Challenge of Transmitting Stimulative Effect
Hollenhorst noted that even if the Fed cuts interest rates, it may not be enough to stimulate the economy due to the current yield curve. "Most economic activity is going to be more responsive to a 5-year yield, the 10-year yield. It’s not really about the overnight policy rate," he said.
Conclusion
The Federal Reserve is expected to cut interest rates multiple times in the coming year in response to a slowing economy. While Citi analysts believe that the rate cuts will stimulate the economy, they also warned that the effects may be limited due to the current yield curve.
FAQs
- Why is the Federal Reserve likely to cut interest rates?
The Federal Reserve is likely to cut interest rates due to fresh signs of a slowing economy, including the Institute for Supply Management’s service-sector gauge and the monthly jobs report.
- When can we expect the first rate cut?
The data and dovish comments from Fed Chair Jerome Powell suggest that the first rate cut will likely occur in September.
- How many rate cuts can we expect?
Citi analysts are predicting eight rate cuts, with each cut totaling 25 basis points.
- What will happen to the economy if the rate cuts occur?
The rate cuts will stimulate the economy and prevent a recession. However, the effects may be limited due to the current yield curve.
- What is the Sahm Rule?
The Sahm Rule is a recession indicator that could be triggered in August if unemployment continues to rise at its current pace.
- Who is Andrew Hollenhorst?
Andrew Hollenhorst is the chief U.S. economist at Citi Research, who has a dimmer view of the economy and has been warning of a hard landing.
Author: fortune.com
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