The market is betting that the Federal Reserve will cut the rate by 25 points and expects further reductions in 2024

The Federal Reserve to cut interest rates by 25 basis points in each of the three remaining U.S. central bank monetary policy meetings in 2024according to most economists polled by Reuters. Only nine of 101 analysts expect a half-percentage point cut next week.

With inflation approaching the Fed’s 2% target and some signs of economic slowdown, monetary policymakers have made it clear that “the time has come” to begin reducing the federal funds rate, which has remained in the 5.25%-5.50% range since July 2023.

Following the release of the mixed August jobs report, interest rate futures contracts briefly priced in a greater than 50% chance of a half-percentage point cut next week, but the odds have dropped to about one in fourRate markets still expect more than 100 basis points in rate cuts this year.

Comments by New York Fed President, John Williamsand Fed Governor Christopher Waller late last week, also failed to signal support among policymakers for a sharp rate cut this month.

Wall Street: the data from the survey

A broad majority of economists in the Sept. 6-10 survey, 92 of 101, expect a 25-basis-point cut when the Fed’s Federal Open Market Committee (FOMC) concludes its two-day meeting next week.

“The jobs report was weak but not catastrophic. On Friday, both Williams and Waller did not offer explicit guidance on the urgent issue of 25 basis points versus 50 on September 18, but both offered a relatively benign assessment of the economy, which in my view strongly points to a 25 basis point cut,” said Stephen Stanley, chief US economist at Santander.

Among the major carriers surveyed, Santander has provided the most consistent year-end rate outlook throughout 2024, predicting total cuts of 50 basis points in every Reuters poll until July, when it changed to 75 basis points.

Fifty-four of the 71 economists surveyed said a 50-basis-point cut at any of the Fed’s remaining meetings this year was unlikely, including five who said it was very unlikely. The other 13 said such a move was very likely, with four saying it was very likely.

“If the Fed were to cut by 50 bps in September, we think markets would take that as an admission that it is behind the curve and needs to be accommodative, not just back to neutral,” said Aditya Bhave, senior U.S. economist at Bank of America.

A majority of economists polled by Reuters since May have been calling for two Fed rate cuts this year, but the number rose to three last month.

Some economists have argued that reductions in borrowing costs are not intended to respond to an ailing economy, but to reduce the amount of policy restraint as inflation falls toward the Fed’s target.

Economic expansion

The median probability of a recession in the latest survey was 30%, a figure that has changed little over the year, despite recent concerns in financial markets about a possible economic contraction.

After its meeting next week, the Fed will deliver two additional 25-basis-point rate cuts this year — in November and December — according to 65 of 95 economists. This is up from 55 of 101 last month.

Among 19 major traders surveyed, 11 expected the Fed to make a total of 75 basis points in rate cuts this year.

The U.S. economy, which grew at a 3.0% annualized rate in the second quarter, is expected to expand at or above what Fed officials currently view as the noninflationary 1.8% growth rate over the next few years, according to the survey’s median forecasts.

The unemployment rate was forecast to remain around the current 4.2% through the end of 2026. Personal consumption expenditures (PCE) price index inflation – the Fed’s preferred measure – is expected to reach the 2% target in the first quarter of 2025.