ISTANBUL
The US Federal Reserve’s first interest rate cut this year is expected to come in May, according to an expert.
The Fed on Wednesday kept its federal funds rate unchanged, as expected, in the 5.25%-5.5% target range – the highest level in 23 years.
The Federal Open Market Committee (FOMC), however, did not provide much hints about when it will begin to lower interest rates this year.
“(Fed) Chair (Jerome) Powell’s post-meeting press conference and commentary by several FOMC members prior to the meeting … all signaled that a March cut is unlikely,” Martin Wurm, a director at Moody’s Analytics, told Anadolu.
He said the FOMC “also emphasized that despite inflation moving towards a more desirable direction, it remains too high.”
“The FOMC removed the phrase ‘additional policy firming’ from its meeting statement, indicating that policymakers believe the federal funds rate has peaked for the current tightening cycle,” he added.
The FOMC statement said it does not expect to reduce interest rates until it has gained “greater confidence” that inflation is moving sustainably toward 2%.
Powell, in his post-meeting press conference, said the FOMC wants to see the “continuation of more good (macroeconomic) data,” for example six months of “good” inflation figures.
“Average monthly core CPI inflation decreased from an annualized 4.6% in the first half of 2023 to 3.2% in the final six months of the year, a trend we foresee continuing,” Wurm noted.
“We concur with the Fed’s interpretation that recent data points suggest a cooling trajectory for inflation, despite monthly fluctuations.”
Annual consumer inflation in the US slowed down to 3% in June 2023, but picked up slightly to 3.1% in November before accelerating to 3.4% in December.
Those figures, however, are significantly lower than 9.1% recorded in summer of 2022, when consumer inflation climbed to its highest level in more than 40 years.
“The FOMC will only consider rate cuts once there’s sufficient evidence that inflation is sustainably moving to the Fed’s 2% target,” Wurm said.
Rate cut expectations
Powell said at the press conference that the FOMC believes the policy rate is “likely” at its peak in the monetary tightening cycle, adding that it may be “appropriate to begin dialing back policy restraint at some point this year,” but only “if the economy evolves broadly as expected.”
“We maintain our view, as we have since last fall, that the Fed has concluded its rate hikes,”said Wurm.
“We predict the first cut at the May meeting, with four 25-basis point rate cuts by year-end in total.”
The probability of a rate cut of 25 basis points at the Fed’s March meeting stood just at 35.5% as of Thursday, according to the FedWatch Tool provided by the US-based Chicago Mercantile Exchange Group.
The probability of a rate cut of 25 basis points in the May meeting was 62.6%.
“We expect the Fed to gradually ease monetary policy thereafter, reducing rates by 25 basis points per quarter until it reaches 3% in the second half of 2026 and 2.5% by 2030,” Wurm added.
Dependent on data
Powell on Wednesday repeatedly said that future rate cuts will depend on incoming macroeconomic data, including inflation, economic growth, job additions and unemployment in the labor market.
“Cooling labor markets have alleviated concerns about wage pressures, as evidenced by the employment cost index for wages and salaries ending 2023 below expectations at 4%,” said Wurm.
“At the same time, recession odds have fallen, most clearly evidenced by much stronger-than-expected annualized real GDP growth at 3.3% in the fourth quarter of 2023. This underlying strength of the US economy will likely ease the Fed’s urgency for rate cuts in the immediate future.”
Powell also said the US economy has surprised forecasters in many ways since the coronavirus pandemic, adding that it is too early to declare victory about achieving a “soft landing” – a situation where a central bank manages to bring down inflation and cool down a hot economy but avoids a recession.
“Certainly, I’m encouraged and we’re encouraged, by the progress. We think we have a way to go,” he said on Wednesday.
“The economy is broadly normalizing, and so is the labor market. That process will probably take some time ... Wage increases are still at a very healthy level.”
The Fed chair, on the other hand, also warned that if inflation starts to increase again, this could warrant rate cuts to come at a slower pace.
He emphasized that “good” inflation figures would signal the need for faster interest rate cuts, while high inflation numbers would mean cuts at a slower pace.
