Fed to Cut Rates by 25bps in November and December, Reaching Neutral Level Sooner – Reuters Poll

By Indradip Ghosh

BENGALURU – A recent snap poll of over 100 economists indicates a strong consensus that the U.S. Federal Reserve will reduce the federal funds rate by 25 basis points in both November and December.

The central bank began its rate cuts with an unusually large half-percentage-point reduction, a move that Fed Chair Jerome Powell cited as a demonstration of the Fed’s commitment to maintaining low unemployment as inflation approaches the 2% target.

While the market largely anticipated this half-point cut, only 9 out of 101 economists surveyed before the decision had predicted it. Some economists have expressed concerns over the clarity of the Fed’s communications, particularly given the current economic strength and relatively low unemployment rate of 4.2%.

According to the latest survey, the central bank is expected to approach the neutral interest rate—one that neither restricts nor stimulates economic activity—by the end of next year.

More than three-quarters of economists, specifically 86 out of 107, see rates decreasing by 50 basis points this year, settling in the 4.25%-4.50% range after quarter-percentage-point reductions in the upcoming meetings. This projection aligns with the median from the Federal Open Market Committee’s dot-plot, although it falls short of the 75 basis points that the markets have priced in.

A smaller group of economists offered differing views: 16 predicted a total cut of 75 basis points this year, while five anticipated only a 25 basis point reduction.

Looking ahead to 2025, poll medians suggest that the Fed will implement 50 basis points of cuts in the first quarter and an additional 25 basis points in each of the following two quarters, totalling 100 basis points of reductions, which would bring the rate down to a range of 3.25%-3.50%.

David Mericle, chief U.S. economist at Goldman Sachs, believes this target will be reached slightly sooner than anticipated. He noted that the urgency indicated by the recent half-point cut and the accelerated pace of cuts projected for 2025 suggest a longer sequence of consecutive reductions is likely. As a result, his firm has revised its forecast to reflect a series of 25 basis point cuts from November 2024 through June 2025, ultimately reaching the forecasted terminal rate of 3.25%-3.50%.

The Fed’s assessment of the long-term "neutral" rate is 2.9%, with projections suggesting it will not be achieved until 2026. Oscar Munoz from TD Securities expressed concern that there might be a risk of the Fed needing to revert to its neutral stance sooner than expected, as both objectives of its mandate are nearing their steady state.

The Fed’s recent economic projections indicate that the unemployment rate, currently at 4.2% as of August, is expected to rise to 4.4% and remain steady through 2025. Jonathan Millar, senior U.S. economist at Barclays, noted that unless unemployment exceeds 4.4%, the Fed may be more inclined to reduce rates by smaller increments, establishing a higher threshold for further aggressive cuts.

When asked to evaluate the Fed’s communication efforts over recent months, responses among economists were almost evenly divided; while 23 respondents found the communication clear, 21 disagreed.