Timing is everything when it comes to the federal funds
rate. Economists are increasingly confident that the first rate cut since 2020 could
happen as flowers are blooming in the late spring and early summer. This aligns
with what Mortgage Bankers Association (MBA) Chief Economist Michael Fratantoni
suggested during October Research’s 2024
Economic Forecast webinar in January.
Federal Reserve Chair Jerome Powell revealed he believes the
financial markets are “in the right place” for a cut in the coming months while
testifying before the Senate Banking Committee on March 7.
“We are waiting to become more confident that inflation is
moving sustainably down to 2 percent,” Powell said. “When we do get that
confidence, and we’re not far from it, it will be appropriate to begin to dial
back the level of restriction so that we don’t drive the economy into
recession.”
During the webinar, Fratantoni predicted a trio of cuts are
likely throughout the year, with more to come in the two years to follow.
“Our forecast is three cuts this year, beginning in May,
another four cuts in 2025 and a few cuts in 2026,” Fratantoni said. “And we’ll
finish up this cycle with the Fed funds target between 2 ½ and 3 percent. That’s
what the Fed controls directly.”
Fratantoni dug deep into the Fed’s logic behind rate
increases in 2022 and 2023 and why mid-2024 could mark the right time to start reeling
them back in.
“The question was, ‘Had they raised rates enough to bring
inflation back down to the 2 percent target?’” Fratantoni said, adding that the
Federal Open Markets Committee (FOMC) also would have to consider whether it
could begin lowering rates without damaging the economy.
“There was uncertainty there, right up until that December [FOMC]
meeting when Chair Powell said … they’re done. They’re at the peak. The next
move is likely to be a cut,” Fratantoni added, noting other Fed officials
confirmed Powell’s sentiment regarding rates at the time.
Powell referenced rates being at “peak” levels during his recent
Senate testimony as well, before delving into what that could mean for monetary
policy in the near term.
“We believe that our policy rate is likely at its peak for
this tightening cycle,” Powell told lawmakers. “If the economy evolves broadly
as expected, it will likely be appropriate to begin dialing back policy restraint
at some point this year.”
However, as he has done consistently when discussing the question
of rate reductions, Powell reiterated that the timing of any cuts will hinge on
inflation activity and labor market conditions, among other relevant
considerations.
“But the economic outlook is uncertain, and ongoing progress
toward our 2 percent inflation objective is not assured,” Powell said. “Reducing
policy restraint too soon or too much could result in a reversal of progress we
have seen in inflation and ultimately require even tighter policy to get
inflation back to 2 percent. At the same time, reducing policy restraint too
late or too little could unduly weaken economic activity and employment. In
considering any adjustments to the target range for the policy rate, we will
carefully assess the incoming data, the evolving outlook, and the balance of
risks. The committee does not expect that it will be appropriate to reduce the
target range until it has gained greater confidence that inflation is moving
sustainably toward 2 percent.”
The majority of economists surveyed by Reuters since
September 2023 have forecast a mid-2024 rate cut, provided market conditions
support such a move. The latest survey results indicate they have only grown
more convinced that all the necessary fiscal pieces are falling into place to
make it a reality.
About two-thirds of the 108 economists surveyed in March predicted
a June rate cut to be likely. By comparison, just over half of February respondents
believed that would be the case.