NEW YORK – Moderating inflation, a cooling jobs market, and a deteriorating outlook for consumer spending mean the Fed may need to cut interest rates more than the market expects.
“We have modest growth and cooling inflation and a cooling labour market — exactly what the Fed wants to see,” ING’s chief international economist, James Knightley, wrote. “This should confirm no need for any further Fed policy tightening, but the outlook is looking less and less favourable.”
Knightley says he expects the Fed will start cutting interest rates in the second quarter of next year, delivering as many as six 25-basis-point rate cuts totaling 150 basis points. He also says he expects the interest-rate cuts to extend into 2025 with at least four 25-basis-point interest-rate cuts. Meanwhile, the futures market suggests the Fed will cut rates by 125 basis points next year.
Knightley’s expected rate cuts would bring the effective Federal Funds rate to about 3.83% at the end of 2024 and to 2.83% at the end of 2025, compared with today’s Fed Funds rate of 5.33%.
Those rate cuts should prove stimulative to the economy over time, but not immediately. Changes to the Fed Funds rate often come with a lag of between 12-18 months before they are felt.
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