MNI: Fed Dots Likely Split Between 1 And 2 Cuts This Year

Federal Reserve officials' interest rate projections Wednesday are expected to cluster around one or two rate cuts this year, down from the majority view of three cuts in March, former Fed officials told MNI.

The median dot in the so-called "dot plot" in the quarterly Summary of Economic Projections is more likely to show two cuts, the former officials said, but there's a decent chance of a hawkish surprise of only one cut by December.

"The dot plot will be a very close call," Ellen Meade, former special adviser to the Fed Board of Governors and Vice Chair Richard Clarida, said in an interview. "It is likely to show between one and two rate cuts."

With the labor market cooling but not at a worrisome pace, Meade said she expects just one cut at year-end.

"The Fed remains focused on inflation and doesn't have to face that tradeoff that could arise. We need to see what the inflation data look like, and I really think that September is unlikely for easing, assuming we don't see some rapid slowing in the labor market or the real economy," she said. "December looks like the time to me."

CPI COULD SHIFT TONE

The May CPI report, due Wednesday before the FOMC meeting concludes, could influence the narrative, the former officials said. Headline inflation is expected to be 0.1% and core 0.3%, in month-on-month terms, or 3.4% and 3.5% year-on-year.

"If it is hot, forget about a rate cut for 2024. If it is lower, then hope for a rate cut in 2024 continues," said former St. Louis Fed economist David Andolfatto, who suspects inflation might settle between 2.5% and 3.0%.

"The labor market continued to look strong. And the Fed has no recent history of cutting its policy rate absent a recession and when inflation is running above target," he said.

Former St. Louis Fed president James Bullard told MNI slightly lower rates would help keep the economy strong and inflation on a glide path back to 2%. "Markets have been between 1.5 and 2 rate cuts this year, and I think that’s still the best bet." (See MNI INTERVIEW: Fed Set For One Or Two Cuts This Year - Bullard)

With a July cut priced out after a hotter-than-expected May jobs report, there aren't enough meetings left in the year to cut three times, Bullard said.

"Are you going to do three in a row? Probably not. Seems like the committee would probably go to two because of that, and others might go to zero or one," he said.

OUTLOOK CHANGE

Former Atlanta Fed President Dennis Lockhart said the median dot was more likely to indicate two cuts in 2024, because a revision to one cut would require the nine officials who wrote down three in March to revise their outlook sharply. "I’m not sure the experience of the second quarter justifies that," he said.

"It’s far more likely we’ll see a median of two cuts," Lockhart said. (See MNI INTERVIEW: Lockhart Worries About Fed's Long Last Mile)

Former Boston Fed President Eric Rosengren wrote on X: "September looks like the earliest -- and needs more supportive data."

"The (Summary of Economic Projections) may be the only interesting result from the meeting. Likely to be a range of cuts from 0-2. But is the median 1 or 2?," he wrote.