Disagreement in forecasting the possibility of the Fed reducing interest rates in 2024

The US Federal Reserve (Fed) needs to cut interest rates at least five times next year to prevent the country’s economy from falling into a recession – a portfolio manager said. However, not all experts or investors agree with this point of view.

In an interview with CNBC, Mr. Paul Gambles – co-founder and portfolio manager of MBMG Group – commented that the Fed is slow in cutting interest rates, and to avoid a policy tightening cycle. extreme and prolonged monetary policy, the Fed will have to reduce interest rates at least five times in 2024 alone.

“I think the Fed’s policy right now is so disconnected from economic factors and out of touch with reality that one cannot make any predictions about when the Fed will wake up and realize the level of impact they have had on the economy,” Mr. Gambles warned.

The federal funds rate, the Fed’s operating interest rate, is at 5.25-5.5%, the highest in 22 years. The futures interest rate market is betting on a probability of over 60% that the Fed will cut interest rates by 0.25 percentage points in March 2024 – according to data from the FedWatch Tool of CME trading platform.

Economists surveyed by Reuters forecast all US inflation measures – including the consumer price index (CPI), core CPI, personal consumption expenditures index (PCE) and core PCE – will fall. gradually but well above the Fed’s 2% PCE target through at least 2025.

Traders are also expecting the Fed to cut interest rates by a total of 1.5 percentage points in 2024. If each cut is 0.25 percentage points, this forecast means the Fed will have 6 interest rate cuts next year – similar to the forecast that Mr. Gambles made.

Regarding the Fed’s scheduled monetary policy meeting next week, veteran investor David Roche said that unless there is an external shock to US inflation – such as an event that causes energy prices to food or energy spikes – almost certainly the Fed has now finished raising interest rates. This means that the Fed will be “unmoved” at its meeting on December 12, 2013, and the Fed’s next interest rate move will be a cut.

Fed officials, including Chairman Jerome Powell, have said the Fed will maintain tight policy until inflation falls sustainably toward the Fed’s 2% target. However, Mr. Roche said the Fed would reduce interest rates even if inflation remained at 3%, because reducing inflation to 2% would be almost impossible in the current context.

“I believe core inflation will persist at 3% and this is already reflected in many asset prices. I don’t think we will reduce inflation to 2%. Inflation is deeply rooted in many things in the economy,” said Mr. Roche – who holds the position of President and global chief strategist of Independent Strategy.

“Core inflation will be higher than before, it will be 3% instead of 2%,” said an investor who accurately predicted the 1997 Asian financial crisis and the 2008 global financial crisis.

Meanwhile, a survey of 102 economists conducted by Reuters news agency from December 1-6 showed that most experts predicted the Fed would keep interest rates unchanged until at least July 2024.

97 economists participating in this survey believe the Fed has completed its interest rate hike cycle, but 52 – more than half of the experts in the survey – forecast the Fed will not begin until July at the earliest. start cutting interest rates.

The level of interest rate cuts forecast in this survey is also more conservative than the market forecast. 72/102 economists surveyed forecast that the Fed will reduce interest rates by a maximum of 1 percentage point in 2024.

“We agree that the Fed will reduce interest rates in 2024, but believe that the market is underestimating that persistent inflation could delay interest rate cuts, until economic activity slows down. clearer,” said Citi chief economist Andrew Hollenhorst.

“We forecast that core inflation will increase in the coming months, upsetting forecasts of a de-escalation of inflation,” Mr. Hollenhorst said, predicting that the Fed will have to wait until the third quarter of 2024 to start reducing interest rates. “And even if we get inflation wrong, meaning inflation continues to decline, as long as economic activity remains strong, the Fed will see that as an opportunity to shore up its credibility by waiting until Only when there is clearer evidence of a sustainable reduction in inflation will we begin to lower interest rates.”

“As it begins to reduce interest rates in 2024, the Fed will maintain a certain level of tightening by closely following the decline in inflation. Reducing interest rates and loosening monetary policy is not just a matter of numbers, there is an important difference,” Morgan Stanley chief economist Ellen Zentner said, warning against thinking the Fed is lowering interest rates. next year’s interest rate is an easing cycle.

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