A survey showed a growing expectation that the Federal Reserve will initiate rate cuts in June 2024, with more than half of its respondents anticipating a reduction by that month.
According to the latest CNBC Fed Survey, it rises to 69% by July, although the respondents do not expect rate cuts next year to be aggressive or as quick as markets have priced in.
Overall, the survey noted that the average respondent predicts approximately 85 basis points of cuts next year, equating to one 25 basis point trim a quarter. However, this falls short of the 120 basis points built into futures markets.
Federal Reserve Needs to Begin Laying out a Road Map to Rate Cuts
The survey reflects a divergence of opinions among 35 respondents, which include economists, strategists, and analysts, with some leaning towards rate cuts and others adopting a more hawkish stance.
The debate centers on the timing and necessity of these potential rate cuts. John Ryding, chief economic advisor to Brean Capital, emphasized the need for the Federal Reserve to begin laying out a roadmap for rate cuts, which "may represent tighter policy since cuts will be lagging the decline in inflation and real rates will be rising."
Kathy Bostjancic, chief US economist at Nationwide, suggested that markets have prematurely priced in the likelihood of rate cuts in Q1, anticipating that steady disinflation will prompt the Fed to consider rate cuts around mid-year.
The survey also indicates a shift in expectations regarding the economic landscape. Respondents have increased the probability of a soft landing to 47%, a 5-point rise from the October survey. Simultaneously, the likelihood of a recession in the next year has decreased by 8 points to 41%, reaching its lowest point since spring 2022, according to CNBC.
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Survey Respondents Anticipate Challenges Ahead
While the overall sentiment is cautiously optimistic, the average respondent anticipates challenges ahead. Projections include a rise in the unemployment rate to 4.5% next year and gross domestic product (GDP) hovering at just below 1%, indicating a potential economic slowdown.
Joel Naroff of Naroff Advisors cited indicators like softening hiring, income growth, and consumer confidence, pointing to reduced consumer and business spending.
However, Diane Swonk, chief economist at KPMG, expresses confidence in the resilience of the US consumer while also emphasizing the need for a balanced approach by the Fed that allows for a smooth economic transition.
"The key is for a 'Rocky' ending, with the consumer still standing and able to leave the ring and heal, once the Fed rings the final bell and starts to cut rates," Swonk noted.
According to CNBC, inflation is seen to decline on average to 2.7% by the end of next year, lower than the expected year-end level of 3.2% for the consumer price index. About a third of respondents predict the Fed will hit its 2% inflation target in 2024, while 37% say it will happen in 2025, and 28% expect it to happen after 2025 or never.
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