So how fast will the Federal Reserve cut and when? The latest thinking: It will decrease rates gradually, in quarter-point increments, and it will start soon.
By year-end, the interest rate drop could be three-quarters of a percentage point (75 basis points) or perhaps as much a full point, according to the futures market’s bets. Either way, hardly anyone doubts that the reduction in the Fed’s benchmark rate will begin in September, the first downward movement in the rate since the central bank began tightening in March 2022.
Importantly, futures traders, as reflected by the CME Fed Watch Tool, concur that the steps will come in increments of a quarter-point each during the year’s three remaining meetings of the Fed’s policymaking committee. That marks a change: Just one week ago, predictions favored a half-point cut in September.
Action Economics, a research firm, forecasts the Fed’s target falling to between 4.5% and 4.75% by year-end, a 0.75-point drop, then continuing downward another full point by the end of 2025. The Fed “will take advantage of the market’s expectations for cuts of up to 100 bps through year-end to ease by 25 bps also in November and December, helping protect against a hard landing in 2025,” wrote Sam Stovall, the chief investment strategist at CFRA Research.
The Fed’s dot plot, which shows the policymakers’ consensus expectations for rates and the economy, will get even more attention than usual once it is released after the September 18 meeting.
Buoying the latest rate projection was the calm inflation news: The Consumer Price Index for July had its lowest reading since 2021 and came in slightly less than economists’ expectations of 3%.
Some viewed the surge in retail sales, up 1% last month from June, as a worrisome sign of a hotter economy that might cause some inflation pressure. But that assessment has drawn skepticism. As Piedmont Crescent Capital pointed out in a commentary, the increase was pumped up by a one-time event—a catch-up in auto sales, which previously had been held back by a June cyberattack affecting car dealerships.
Undergirding all: The overwhelming consensus is that rates are too high, now that inflation is under control, and the economy needs lighter debt payments.
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Tags: CFRA, CME Fed Watch Tool, Cyber Attack, Federal Reserve, inflatgion, Interest Rates, Piedmont Crescent Capital, retail sales, Sam Stovall