Ex-Fed president thinks only one rate cut is possible this year

A former central bank insider thinks the Fed will be lucky to get away with just one interest rate cut this year.

According to former Kansas City Fed President Esther George, the central bank’s “policy path will change a bit” following months of hotter-than-expected inflation data.

George, who recently retired after 30 years at the Kanas City Fed, thinks policymakers are now split on whether to forecast one or two rate cuts this year. Ultimately, he says, they’re likely to err on the side of caution.

“My expectation is the dots will show and confirm what I think the market has picked up, and that is fewer rate cuts with the inflation forecast holding,” she said, referring to the Fed’s now infamous quarterly “dot plot” interest rate forecasts.

The Fed’s dot plots are notorious for a poor track record in forecasting interest rates. Nevertheless, they provide valuable insight into the thinking of the Fed’s interest-rate setters.

Fed officials have wrestled with the idea of rate cuts for the better part of six months. As recently as March, Chairman Jerome Powell was steadfast in his expectation that the Fed was on track to lower rates three times this year.

Unfortunately, even he threw in the towel on that possibility following months of dismal inflation readings.

What does the market think?

There doesn’t seem to be a clear consensus on the pace and timing of Fed cuts, if any.

According to CME Group’s FedWatch Tool, professional traders place the highest odds of there being only one rate cut by December, though two cuts are in a close second. The odds of rates remaining unchanged are around 13%.

Before last week’s jobs report, economists at JPMorgan and Citigroup thought a July rate cut was possible, but even they have relented.

JPMorgan thinks the Fed will hold off until November, whereas Citigroup says a first cut is still possible by September.

But then there’s Jim Luorio, a managing director at TJM Institutional Services, who believes the one-two punch of slow growth and high inflation puts a 2024 rate cut “increasingly out of reach.”

Goldman Sachs CEO David Solomon seconds that view, thinking there will be “zero” cuts this year.

Former Fed governor Larry Meyer thinks investors should focus less on the number of cuts and more on the “strength” of the Fed’s story. “I always emphasize the importance of a story,” Meyer said, referring to the Fed’s explanation of its policy strategy.

“The strength of the story depends on the degree of uncertainty, which has spiked of late. In that case, we should pay more attention to alternative scenarios,” he explained.