Economists See Fed Buying Into Rate Cuts in 2024

NAFCU economist predicts rate cuts will start this spring, more than two years after the Fed started raising rates.

Fed Chair Jerome Powell answers reporters’ questions at a news conference in Washington, D.C., Wednesday.

Economists said they are more confident the Fed is committed to rate cuts next year following its decision Wednesday to keep rates at their current level.

The Federal Open Market Committee decided to leave the Federal Funds Rate in the 5.25% to 5.5% range – the third meeting it has left rates alone since it last raised rates 25 basis points in July.

Curt Long

NAFCU Chief Economist Curt Long said the statement released by the FOMC after the meeting acknowledged inflation has made significant headway back toward the committee’s 2% target.

“Updated economic projections confirm what markets have come to believe: Namely, that multiple rate cuts are in store for 2024. NAFCU expects the first cut will occur during the second quarter,” Long said.

Mike Fratantoni, chief economist of the Mortgage Bankers Association, said it was no surprise that the Fed made no change in rates.

Michael Fratantoni

“The news from this meeting came from the FOMC’s projections regarding the direction of the economy,” Fratantoni said.

The FOMC projections showed a faster pace of rate cuts in 2024.

The survey released at the end of the two-day meeting showed more than half of the FOMC members expect the year-end rate to fall to 4.6% in 2024, 3.6% in 2025 and 2.9% in 2026. Just three months earlier, the median expectation was a 5.1% rate at the end of 2024.

“Additional rate hikes no longer appear to be part of the conversation,” Fratantoni said. “It is all about the pace of cuts from here.”

“This is good news for the housing and mortgage markets,” he said. “We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market. We are forecasting modest growth in new and existing home sales in 2024, supporting growth in purchase originations, following an extraordinarily slow 2023.”

At a news conference following the FOMC announcement, Fed Chair Jerome Powell said FOMC members had talked about lowering rates at this week’s meeting, and predicted rate declines next year.

Powell noted that the Fed has raised rates 5.25% points since early 2022 to last July, helping bring core inflation down from 3.9% to 2.6%.

“Inflation has eased from its high without a significant increase in unemployment,” he said. “That’s good.”

He said inflation is still too high, but with current conditions, rate hikes might not be needed to close the gap. “The full effects of our tightening have probably not yet been felt,” he said.

And Powell said it would be a mistake to wait to start cutting rates until the 2% mark is reached.

“We’re aware of the risks of staying on too long,” he said. “We want to cut before 2% so we don’t overshoot.”

The Survey of Economic Projections released Wednesday showed members are expecting economic growth to slow and inflation to continue falling over the next year.

More than half of members expect personal consumption expenditures (PCE) to fall from 2.8% in this year’s fourth quarter to 2.4% in next year’s, and finally to 2.0% in 2026.

The projections also showed more than half the members at this week’s meeting expect:

Fratantoni, the MBA economist, said the survey was encouraging.

“While the projections don’t show much of a change in the committee’s expectations regarding economic growth or the job market, they do recognize the faster pace at which inflation has declined this year and see further slowing back to the 2% target,” Fratantoni said.

At the news conference, a reporter asked Powell what his biggest surprise was this year. He replied that a year ago most economists in the Fed and elsewhere expected a recession in 2023.

“Not only did that not happen, but we actually had a very strong year,” Powell said.

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