Will the Fed cut interest rates in 2024? Here's what Wall Street, economists, and policymakers think
On Dec. 13, the Federal Reserve closed the chapter on 2023 by voting to leave interest rates unchanged.
The decision came as no surprise, as Fed officials had explicitly hinted in recent months that the chances of further rate hikes were slim.
So, with the last Fed meeting of 2023 behind us, all eyes are now shifting to the new year.
As a recap, the Fed voted to raise its benchmark federal funds rate 11 times in 17 months through July. The federal funds rate currently sits between 5.25% and 5.5%—the highest in 22 years.
Like in 2023, the Fed’s policy-setting committee is scheduled to meet eight times in 2024. Here’s a roundup of what analysts, strategists, Wall Street firms, and even the Fed believe will happen next year.
What analysts think
After an aggressive rate-hike campaign, the Fed is expected to stand pat in the first six months of 2024 before cutting rates in the second half of the year, according to the CNBC Fed Survey of 35 economists, strategists, and money managers.
A majority of respondents think June will be when the Fed begins cutting rates—that figure jumps to 69% by July. Respondents are pricing in 85 basis points’ worth of cuts, meaning the federal funds rate will be around 4.65% by the end of 2024.
The forecast hinges on one crucial factor: Whether the Fed can successfully engineer a soft landing for the U.S. economy.
In Fed lingo, a soft landing refers to the process of gradually reducing inflation without tipping the economy into recession.
The CNBC survey found that 47% of respondents think the central bank will be successful in doing so—up five points from October. They also reduced the odds of a recession next year by eight points to 41%.
Steven Blitz, chief U.S. economist at TS Lombard, believes the Fed will eventually be forced to cut interest rates to support the stock market.
“For the [Fed] in 2024, 3.5% inflation is acceptable, recession is not. With 61% of adults owning equities, the highest since 2008, the Fed is not going to sacrifice faith in equities on the altar of 2% inflation,” he said.
The Wall Street Journal’s quarterly survey of economists published in October came to similar conclusions.
At the time, 59% of the economists polled said July was the final rate increase. Roughly half (49%) said the Fed would begin cutting interest rates in the second quarter of 2024.
What traders think
While economists and analysts may have their opinions, it's the traders who put money where their mouths are.
This is where CME Group’s FedWatch Tool comes in handy. It provides a snapshot of traders’ interest rate expectations based on over a dozen market indicators—that is, actual trades.
According to FedWatch, the first significant rate-cut bets are placed in March, with traders giving nearly a 44% chance of it happening. The likelihood of a rate cut increases to 50% in May and almost 93% in June.
It’s safe to say that traders see the market in a manner similar to analysts: The Fed is finished raising interest rates and is likely to start cutting them around the middle of next year.
What the Fed thinks
Fed policymakers have a more measured outlook on the path of interest rates. In their December “dot plot” chart of interest rate expectations, officials predicted that the federal funds rate will average 4.6% by the end of 2024—lower than the September forecast of 5.1%.
The forecast leaves room for three rate cuts next year, totaling 75 basis points (assuming the Fed cuts rates by 0.25% each time).
The revised outlook is due to a continued moderation in inflation, which is expected to continue next year. The central bank believes current interest rates are enough to complete the job.
“Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation,” the Fed said in its statement.
Before getting too excited about the dot plots, it bears mentioning that the Fed’s projections aren’t gospel. As Creditnews reported, the Fed is infamous for wrongly predicting the economy, inflation, and the path of interest rates.
What the world's biggest asset managers think
Wall Street’s bigwigs have some of the boldest predictions for what the Fed will do next year.
Strategists at UBS—the world's fourth-biggest asset manager—believe the U.S. economy will enter a recession next year, prompting the Fed to slash interest rates by 275 basis points to half their current levels.
UBS predicts the first rate cut will happen in March.
Macquarie, a top-50 global manager overseeing $735 billion in assets, shares a similar outlook and calls for the Fed to cut rates by 225 basis points to 3.25%.
Their reasoning is that borrowing conditions are much more restrictive than they appear on the surface, leading to a more rapid fall in inflation next year.
ING, a Netherlands-based asset manager with over $1 trillion in assets, believes the Fed will cut rates by 150 basis points to around 4%, citing a combination of 'modest growth, cooling inflation, and a cooling labor market.'
This asset manager expects the rate-cut spree to begin in the second quarter of 2024.
In the meantime, Barclays expects a 100-point reduction in the federal funds rate next year, while Goldman Sachs forecasts a much more modest 50-point cut.
Both banks assert that the economy is more resilient than investors give it credit for, reducing the perceived need for imminent rate cuts.