The outlook for Federal Reserve interest-rate policy has oscillated wildly this year.
At the beginning of 2024, experts anticipated up to six rate cuts this year amid an economic slowdown and sliding inflation.
When the economy and inflation turned out to be stronger-than-expected, that forecast fell to one or two rate decreases. And that’s about where predictions have stayed in recent weeks, as the economy finally weakened, and inflation slowed down.
Annualized GDP growth fell to 1.4% in the first quarter from 3.4% in the fourth quarter. And the personal consumption expenditures (PCE) index – the Fed’s favored inflation indicator – decelerated to a year-on-year increase of 2.6% in May from 2.7% in April. The Fed’s inflation target is 2%.
Looking at projections for Fed policy, interest-rate futures point to a 99.8% probability of a rate cut by September, and a 97.4% chance of at least two rate reductions by December, according to CME FedWatch.
The Fed’s next meeting is July 30-31. Interest-rate futures indicate only a 6.7% chance for a rate decrease then.
In terms of the impact of rates on you, higher rates mean larger payouts from your bank accounts and money market funds. But they also mean higher rates on your home, auto, credit-card and personal loans.
Bill Dudley’s case for a rate cut now
Former New York Fed President Bill Dudley thought for some time that the Fed should leave rates higher for longer. But now he has changed his tune and thinks the central bank should act next week. “The facts have changed,” he wrote on Bloomberg.
Looking back, “for years, the persistent strength of the U.S. economy suggested that the Fed wasn’t doing enough to slow things down,” Dudley said. But the Fed boosted rates 11 times from March 22 to July 2023.
Related: Former Fed official changes tune on what's next for interest rates
“Now, the Fed’s efforts to cool the economy are having a visible effect,” he said. Consumption, housing and hiring are slowing. The unemployment rate registered 4.1% in June, up from 3.6% a year earlier.
Combine all that with slowing inflation, and you get Dudley’s call for a rate decrease now. “Although it might already be too late to fend off a recession by cutting rates, dawdling now unnecessarily increases the risk,” he said.
Vanguard sees no rate cuts this year
Economists at Vanguard see things a bit differently. They anticipate the Fed will leave its federal funds rate target at 5.25%-5.5% through year-end.
That's unchanged from their prior forecast. The fed funds rate is charged on overnight interbank loans.
“Continued economic growth, labor momentum, and stubborn inflation are likely to leave the Fed without the confidence it needs to cut interest rates this year,” the economists wrote in a commentary.
Related: Morgan Stanley's explosive call on interest rates if Trump wins
But that’s not a slam-dunk, they said. “Continued favorable inflation readings would likely allow for a rate cut, with September as the most likely timing,” they explained.
“Still, we believe it would be difficult for the Fed to cut its policy rate more than once in 2024. We assign a low probability to inflation reaccelerating enough to warrant a further rate increase.”
Inflation, GDP, stocks
The economists anticipate the PCE price index, excluding food and energy, to hit 2.9% year-on-year in December, up from 2.6% in May.
“We expect shelter and other services prices to remain sticky throughout the year,” they said. The rise in wages this year will boost services prices.
More economic analysis:
- June jobs report bolsters bets on an autumn Fed interest rate cut
- Biden debate flop boosts Trump, but economy may be tougher opponent
- First-half market gains come with a dash of investor unease
As for the economy, “activity appears to be moderating, as productivity and labor supply gains that drove GDP growth in 2023 show signs of subsiding,” Vanguard economists said. They forecast 2% growth for the year as a whole.
Meanwhile, Vanguard analysts predict U.S. stocks will climb 3.4% to 5.4% annualized over the next 10 years (starting June 1). That’s based on the MSCI US Broad Market Index. The forecast stems from valuations, earnings and dividend analysis.
Related: Veteran fund manager sees world of pain coming for stocks
