Chair Powell presents the Monetary Policy Report to the Committee on Financial Services. July 10, 2019. Photo courtesy of the Federal Reserve.

In Morningstar, Sarah Hansen and Caryl Anne Francia discuss the predictions that the Federal Reserve will cut rates as many as five times next year. They write:

We may be savoring the final days of summer, but market watchers are looking ahead to 2024 for clues about the path interest rates will take. That will depend largely on the trajectory inflation takes. Economists expect the Federal Reserve to begin cutting interest rates at some point next year, but there’s no clear consensus on when, or by how much.

The Fed began a steady campaign of rate hikes in March 2022, when inflation was approaching its highest level in four decades. Now, with more than 5 percentage points of hikes in the rearview mirror and a target federal-funds rate between 5.25% and 5.5%, the picture looks much healthier. August jobs data released Friday showed signs of cooling in the labor market, which is another sign that the Fed’s hiking campaign is having its intended effect.

When will the central bank start pumping the brakes? Traders and economists generally agree that cuts aren’t coming this year, but next year is a different story.

“2024 is supposed to be the year when the Fed will not be aggressively raising rates anymore, and will in fact be more accommodative,” says Lawrence Gillum, chief fixed-income strategist at LPL Financial. He says traders are already trying to get ahead of rate cuts, and their bets on rates in 2024 are already reflected in futures trading.

How Much Will the Fed Cut Interest Rates In 2024?

As of Sept. 1, futures prices indicate that traders anticipate about 1.2 percentage points of rate cuts next year, according to Bank of America rates strategist Meghan Swiber. If the Fed lowers rates a quarter-point at a time, that would mean roughly five cuts over the course of the year. In contrast, strategists at Bank of America are anticipating just 0.75 percentage points of cuts in 2024. Swiber attributes the difference to the risk baked into futures markets.

Traders are still accounting for the possibility that the U.S. economy may enter a recession in 2024, which could prompt swifter and larger rate cuts from the central bank. On the other hand, Swiber explains, “A more resilient economy means the Fed is going to have to hold rates higher for a longer period of time.” Bank of America recently revised its view that a recession was likely in 2024, and its experts currently expect a soft landing.

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