Fed officials say they are wary as expectations for interest rate cuts increase, but their tone changes

U.S. financial officials’ statements showed a change in tone this week. It’s a step closer to a conversation that has been going on in the market for some time about when the authorities will start cutting interest rates.

Several Federal Reserve Board members and regional Fed presidents have spoken so far this week, and the Federal Open Market Committee meeting on December 12th and 13th, encouraged by the slowing trend in inflation and indicators of an economic slowdown, has made statements. He indicated that he has no objection to the FOMC meeting deciding to keep interest rates unchanged.

Officials have shown little interest in discussing rate cuts. But Fed Governor Waller, one of the hawkish officials closely watched by Wall Street, said, “Once inflation declines and is low enough, there’s not necessarily a need to keep interest rates at these levels.” He indicated that he would consider cutting interest rates if the slowdown continues. Markets were quick to pounce on the statement, which followed typical policy guidelines used by officials.

Federal Reserve Chairman Jerome Powell will participate in a debate at Spelman College in Atlanta, Georgia on December 1st.scheduleRather than talk about rate cuts, they are far more likely to repeat that it is too early to declare victory in fighting inflation.

Additionally, although the market is pricing in the possibility of four 0.25 point rate cuts in 2024, FOMC participants are likely to continue expecting higher interest rates due to concerns about the risk of reaccelerating inflation. .

Diane Swonk, chief economist at KPMG, said: “Chairman Powell will be careful not to uncork the champagne, but the slogan will quickly change from ‘higher and longer’ to ‘higher and long enough.’ That’s going to change.”

Regarding the quarterly economic forecast that will be released after the FOMC meeting in December, he said, “Inflation is falling faster than officials expected, and we expect more interest rate cuts than in September.” I don’t think that’s going to happen,” he said.

The market is pricing in a 50-50 probability of a 0.25 point rate cut at the FOMC meeting in March next year, and the probability of a 0.25 point rate cut in May is currently 100%, with the market expecting a total rate cut of just over 1 point by the end of next year.

By contrast, the median forecast for the federal funds rate at the end of 2024 was 5% to 5.25%, just 0.25 percentage point below the current level, according to officials’ quarterly forecasts released in September.

Wall Street has even bolder predictions. Deutsche Bank, which predicts a mild recession next year, reiterated its forecast this week that the U.S. Federal Reserve could start cutting interest rates in June and that the rate cuts would reach a total of 1.75 percentage points by year-end. .

Bill Ackman, a billionaire and founder of U.S. asset management firm Pershing Square Capital Management, expects the authorities to cut interest rates as early as the first quarter.

Elena Shuryatieva, senior U.S. economist at BNP Paribas, said that Waller’s recent comments have clearly increased expectations that Chairman Powell will take a position on interest rate cuts. “I don’t think we’ll get into it until we’ve thoroughly confirmed the tone of the party.”

“Ultimately, the Fed’s goal is not necessarily to achieve a soft landing, but to return inflation to the agency’s 2% target,” Shulyatieva said.