The Fed Is Trying Its Best To Lower Expectations in 2024 as Pundits Call for Rate Cuts

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The year’s final Federal Open Market Committee (FOMC) meeting concluded with no changes to the federal funds rate.

This is now the third consecutive meeting that the Fed has held rates steady as they continue to hope that the previous rate hikes are still working their way through the economy—and will be enough to cool inflation to that coveted 2%. 

Looking at the CME Group FedWatch Tool, which uses futures investing to determine the probability of future Fed moves, the central bank will again hold rates steady at its January meeting. But by March or May, the chance of a rate cut soars, according to the tool. Though those probabilities are always in flux, at the time of writing, there was a 40% chance the Fed would lower rates in March, and by May, it’s 73%.

It appears Fed Chair Jerome Powell wants to temper those expectations, though—at least if you listen to his most recent speech at Spelman College. Here’s what he said—and what other Fed members and economists are thinking about interest rates as we head into the new year.

“Restrictive” Was the Watchword

Powell mentioned “restrictive” policies multiple times when addressing the Spelman audience—a nod to the nearly dozen rate hikes the FOMC has voted for since early 2022. 

According to Powell, those rate hikes might not be the last. He said at the event:

“The FOMC is strongly committed to bringing inflation down to 2% over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective. It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.”

Powell also noted that while the economy is “moving in the right direction,” future policy moves will need to be handled carefully and as the data comes in.

“Let the data reveal the appropriate path,” Powell said. “We don’t need to be in a rush now, having moved quickly and forcefully. We’re getting what we wanted to get. We now have the ability to move carefully.”

Eyeing Midyear Rate Cuts

Though Powell seems to want thoughts of any rate cuts squashed, other Fed members and financial pros aren’t so certain. At a recent event, Fed Governor Christopher Waller said that should inflation keep declining for a few more months, “We could start lowering the policy rate.” That timing would align with—as the FedWatch Tool’s projections suggest — the Fed’s March or May meetings in 2024.

Forecasters at Pantheon Macroeconomics predict the same. The group’s December Economic Monitor shows the Fed will lower its rate by 1.5% next year, with rate cuts starting in March.

Finally, a CNBC Fed Survey of economists and financial analysts points to rate cuts, though slightly later than other predictions—possibly June or July. 

As Kathy Bostjancic, chief U.S. economist at Nationwide, told CNBC in response to the survey, “The markets have prematurely priced in high odds of rate cuts starting in Q1, but we do expect further steady disinflation will lead the Fed to begin rate cuts around midyear.”

But all in all, it’s the Fed that controls the lever here, not the forecasters.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.