Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The US central bank will hold off on interest rate cuts until at least July 2024 and deliver less relief than financial markets expect, according to leading academic economists polled by the Financial Times.
While most of those surveyed thought the rate-raising phase of the Federal Reserve’s historic monetary tightening campaign was now over, almost two-thirds of the respondents thought the central bank would only begin to cut its benchmark rate by the third quarter of 2024 or later.
Three-quarters of the economists, polled between December 1 and December 4, also expect the Fed to lower the federal funds rate from its current 22-year high of 5.25-5.5 per cent by just half a percentage point or less next year.
That is a much later and smaller move than Wall Street is wagering, with traders in futures markets ramping up bets that the Fed will begin to cut as early as March and will lower the federal funds rate to about 4 per cent by the end of the year — more than a full percentage point below its current level.
The survey of 40 economists, carried out in partnership with the Kent A Clark Center for Global Markets at the University of Chicago Booth School of Business, underscores the divergence of views about the Fed’s grip on inflation amid fresh signs that the world’s largest economy is beginning to slow down.
Officials at the Fed and other central banks in advanced economies are now grappling with how long to keep interest rates high to restrain demand from households and businesses — and when they can start reducing borrowing costs.
“I still see a lot of momentum for the economy, so I don’t see a need for lowering rates right away, and I don’t think the Fed plans to do that either,” said James Hamilton, a professor of economics at the University of California in San Diego who participated in the survey.
Robert Barbera, director of the Center for Financial Economics at Johns Hopkins University and another respondent, said the Fed would need to see both steady improvements in inflation and a more significant cooling in labour demand before it considered cuts.
For the past five months, the US economy has added an average 190,000 new jobs a month — a pace Fed governor Christopher Waller recently noted was near the 10-year average since 2010 but still higher than needed to absorb all the workers entering the labour force. New data released on Friday is expected to show an increase of 180,000, according to Refinitiv, compared with 150,000 in October.
Laura Coroneo, an economist at the University of York, said that aside from a “still tight” labour market keeping wage growth elevated, she was also concerned about the potential of an oil price shock to affect how quickly inflation would fall.
The Opec+ cartel recently agreed to make cuts to crude output in 2024 in a bid to boost oil prices. The ongoing war in Ukraine and escalating conflict in the Middle East have also bred fears of further inflation in energy costs.
Most of the economists surveyed thought it unlikely that the Fed’s preferred inflation gauge — the personal consumption expenditures price index, once food and energy prices are stripped out — would remain above 3 per cent by next December, but they did expect it to exceed the central bank’s 2 per cent target at that point. Their median estimate for the end of 2024 stood at 2.7 per cent. The gauge registered a 3.5 per cent annual pace in October.
According to the median estimate, the economists predicted US gross domestic product growth once inflation is factored in of 1.5 per cent next year, well below the clip so far this year.
In addition to keeping interest rates elevated for an extended period, the economists also do not expect imminent changes to the Fed’s plans to shrink its nearly $8tn balance sheet.
More than 60 per cent of the economists polled reckoned the central bank would not slow its quantitative tightening programme until the third quarter of 2024 or later. As part of its efforts to tighten financial conditions in the economy and damp demand, the Fed has since September 2022 aimed to cut up to $95bn a month from its asset holdings.
Most of the economists did not think there was a high chance of a recession starting next year, while a little over half said there was at least a 50 per cent chance that a recession would start in the third quarter of 2025 or later.
The participants were roughly split on the outlook for the unemployment rate, with a slim majority expecting it could hit 5 per cent or more over the next three years. The remaining 46 per cent expected it would stay below that level.
The employment rate has defied expectations of a sharp rise over the past year, nudging up only marginally, to stand at 3.9 per cent.