The Federal Reserve is likely to lower interest rates by a quarter-point next week and at each of the two meetings that follow, according to economists surveyed by Bloomberg News.
While investors have largely converged around the likelihood of such a move when officials gather Sept. 17-18, the majority of the 46 economists surveyed see policymakers opting for a more gradual pace of rate reductions than the full percentage point of cuts traders anticipate through the rest of the year.
Just a few of the economists surveyed expect a larger half-point reduction at either the central bank’s November or December meeting, according to the poll conducted Sept. 6-11.
That said, respondents do see policymakers penciling in a more aggressive rate-cut path in the years ahead compared to what officials had projected in June, the last time they updated their economic and rate forecasts. The median projection will likely show interest rates in a range of 3.5%-3.75% by the end of next year and 2.75%-3% by the end of 2026.
“I expect the Fed to cut rates and also signal a series of additional rate cuts are likely at upcoming meetings to scale back the restrictiveness of monetary policy,” said Scott Anderson, chief US economist at BMO Capital Markets.
Higher Unemployment
The steeper pace of cuts aligns with increasing worries about a slowdown in hiring and a rise in the unemployment rate over the past year. That has helped bolster the case for starting to normalize policy now, before inflation has fully cooled to the Fed’s 2% goal.
Economists see policymakers’ median unemployment rate forecast edging up to 4.3% this year, up from the 4% projected in June. Furthermore, 80% of economists saw risks to unemployment as weighted primarily to the upside.
Even with the increased concern about the labor market, more than three-fourths of those surveyed said the economy would likely continue to expand over the next 12 months.
Economic growth forecasts are expected to remain unchanged in officials’ latest quarterly projections, but the inflation and core inflation estimates will likely fall a bit, economists said. Still, respondents’ views on whether the risks to inflation were to the upside or downside were mixed.
Fed Chair Jerome Powell signaled at a recent conference in Jackson Hole, Wyoming, that he and his colleagues would likely be cutting rates at the September meeting. He said further weakening in the labor market was “unwelcome.”
But some policymakers are concerned inflation could reignite once they start cutting and have advocated for a more gradual pace to normalizing policy. Housing inflation, which has been a major driver of price increases over the past few years, hasn’t yet cooled substantially. Some worry lower interest rates will spur increased activity and even higher prices.
Gradual Pace
The word “gradual,” which some policymakers have used to describe their hopes for the pace of rate cuts, took on different meanings for different people. Just over half of economists in the survey said a gradual pace means quarter-point reductions at every meeting, though 27% see it as a cut at every other gathering. Forecasters expect the central bank to lower rates to as low as 3% in this cutting cycle, according to the median estimate.
While a large majority of economists see next week’s decision as unanimous, 16% see a chance of a dissent in favor of a larger move. Dissents have been rare during Powell’s tenure as chair and such a move by a regional Fed bank president would be the first since 2022, when the Fed started rapidly raising interest rates to try and cool demand. A governor dissent, which is much rarer, would be the first since 2005.
Economists are split on how the Fed will communicate next week’s policy action. While a majority see the Fed changing its post-meeting statement to be more dovish, emphasizing more concern on employment, there was less consensus on exactly how policymakers would signal future moves.
Some 44% of those surveyed said officials will change the statement to acknowledge the possibility of further adjustments, while 31% said they’d more explicitly state their intent to pursue a string of rate cuts and provide guidance on the pace. One in five economists said the Fed wouldn’t change its guidance on further adjustments to policy.
“The statement will acknowledge slower job growth and the higher unemployment rate, but will say that the labor market is roughly consistent with maximum employment,” said Gus Faucher, chief economist at PNC Financial Services Group. “But the statement will also say that further weakening in the labor market is not desired.”
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