The Fed sees a curb on plans to cut interest rates as inflation remains high

(Bloomberg) — Economists are divided over how many interest rate cuts Federal Reserve officials will signal for 2024 at their policy meeting next week, after a surprise spike in recent inflation numbers.

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Policymakers are likely to back down from their long-term expectation of cutting interest rates three times this year, but it is a close step on whether or not they will continue with two cuts. A 41% majority of economists expect the “dot chart” to show two cuts, while 41% expect the forecast to show only one or no cuts at all, according to a Bloomberg survey.

The Federal Open Market Committee, which has kept the benchmark interest rate at the highest level in two decades since last July, was encouraged by the sharp decline in inflation in the second half of 2023, to decide on a gradual cut in interest rates for this year. But those plans have been postponed after no progress was made to start in 2024.

“The Fed is awaiting a series of data that reinforces its confidence that inflation is on a sustainable path toward its 2% target,” Ryan Sweet, chief US economist at Oxford Economics, said in response to the poll. “The balance of risks to our inflation outlook remains weighted to the upside.”

Officials are confident of keeping interest rates steady in the 5.25% to 5.5% range for the seventh straight meeting next week. Chairman Jerome Powell and his colleagues will update their economic and interest rate forecasts at the June 11-12 meeting for the first time since March.

Lower cuts indicate a later start of cuts. This could have implications for the presidential election in November, although Fed officials uniformly say their decisions are based solely on economic considerations.

Fed watchers expect the first cut to take place at the central bank's monetary policy meeting in September, the final gathering before voters head to the polls on November 5. The GDP is at an annual rate of 2.1% and the unemployment rate at the end of the year is 4%.

The survey, which included 43 economists, was conducted from May 31 to June 5.

The vast majority of those surveyed said the Fed would cut interest rates in response to falling inflation, not some labor market shortage or economic shock. Neither economist said there was a high probability the interest rate's next move would be higher — an outcome sometimes mentioned as a possibility by officials such as Minneapolis Fed President Neel Kashkari.

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A number of Fed leaders have indicated in recent weeks that they see no rush to cut interest rates, with inflation persisting and growth expectations remaining strong. Inflation by the Fed's preferred measure was 2.7% in the year through April, and economists expect relatively little progress toward the central bank's 2% target in the second half of the year compared to low monthly numbers in late 2023.

Ahead of his self-imposed calm period, Fed Governor Christopher Waller said the central bank may consider cutting interest rates “at the end of this year,” a view echoed by Atlanta Fed President Raphael Bostic. Cleveland Fed President Loretta Mester said she wanted to see “a few more months of inflation data that appears to be coming down,” while Susan Collins of the Boston Fed said “patience is really important.”

Nearly all participants expect the Fed to maintain its May 1 guidance that there will be no appropriate reduction until the central bank has greater confidence that inflation is moving sustainably toward 2%. Economists are divided on how the FOMC describes inflation, with most expecting the committee to reiterate that there has been a lack of recent progress.

“The FOMC will likely say there is some encouraging data, but it needs to see more evidence for confidence to return,” said Luke Tilley, chief economist at Wilmington Trust.

On the second day of next week's meeting, the government will announce the consumer price index for May. While the Fed focuses on a separate measure of prices, the CPI is expected to show inflation continuing to slow.

“The CPI reading is likely to influence the FOMC's tone,” said Stephanie Roth, chief economist at Wolfe Research. “While we expect a modest reading, a figure below 0.30% can be seen as further evidence of a slowdown in inflation.”

Fed staff have been anticipating a soft landing for the economy since last July. Economists themselves have become increasingly optimistic about growth prospects. Only 3% of respondents expect a recession in the next 12 months, much lower than the 58% we saw last July.

While Fed leaders were vague on what set of economic metrics would trigger a rate cut, 60% of economists said an important catalyst would be three consecutive positive reports on core inflation. Inflation numbers from January to March are disappointing, and economists say an equal number of good reports would pave the way for interest rate cuts.

Beyond that, Elisabet Kopelman, a US economist at Skandinaviska Enskilda Banken AB, said “clear evidence of a slowdown in the labor market” could lead to interest rate cuts.

The government's May jobs report, published on Friday, showed a mixed picture regarding the state of the labor market. Salaries and wages growth accelerated, despite high unemployment and low labor force participation.

Traders read the jobs data as likely to push back the timing of grid rate cuts, and now expect cuts of 1.5 points this year, according to futures.

– With assistance from Sarina Yu and Alex Tanzi.

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