MNI: Fed Dots To Show Bias Toward Front-Loaded Rate Cuts

MNI (WASHINGTON) - The September update to Federal Reserve officials' individual forecasts is expected to show more interest rate cuts sooner, with policymakers clustered around 75 basis points this year and another 100 to 150bp in 2025, former Fed officials and staff told MNI.

The median dot in the so-called "dot plot" of the path for U.S. interest rates is likely to show 50bp more this year than it did in June, the former officials said, but there's a decent chance that several FOMC members see a steeper downward path with one or more 50bp cuts to start the easing cycle. 

“I'm expecting 25bp next week, and 50bp more in the remainder of 2024," former New York Fed President Bill Dudley told MNI. In 2025, he expects another 100 to 150bp and "maybe slightly more after that to take fed funds rate down to around 3% at the end of 2026.” 

The Fed's benchmark overnight rate has been set in a 5.25%-5.5% range since July 2023. 

GETTING TO NEUTRAL

Inflation estimates in the September projections will likely drop several ticks this year, and the median unemployment rate forecasts are seen edging up a few tenths from 4.0% previously, the former officials and staffers said. 

Worries over the jobs outlook have put the larger 50bp cut on the table for next week, they said. "I've shifted just a little towards thinking there are bigger risks to the downside here, but they're still fairly balanced," said William English, a former director of the Fed Board's division of monetary affairs. 

"It's the first meeting in a long time that is genuinely uncertain," he added, noting that the Fed could cut by between 75bp and 125bp through the end of the year depending on the balance of risks to the outlook.

"It really does come down, in this case, to a sense of the balance of risks. Do they feel that there's a significant risk that the economy just slows, and so they want to try to head that off, or they're more comfortable that the economy is more or less solid?"

The main story officials will be telling in their forecasts will be about getting close to neutral by the end of 2025, said Jonathan Wright, a former deputy associate director at the Fed Board's division of monetary affairs. "They'll front-load some of that," he said.

"They will be talking about getting to their longer-run estimate – most of the way there – in the next 15 months. If they're going at a pace of 25bp a meeting, they'll actually be done before the end of next year," Wright said. That would be 75bp of cuts this year and about 150 in 2025. "It will probably be a relatively big revision to the SEP."

SOFT LANDING?

A material deterioration in the labor market would prompt a step up to a 50-basis-point cut, said former Atlanta Fed President Dennis Lockhart. (See: MNI INTERVIEW: Balanced Risks Call For Gradual Cuts - Lockhart)

"It’s fair to say some amount of soft landing has been achieved already. There’s every reason to be optimistic that more months of avoiding a recession and making progress are ahead," Lockhart said. "I can imagine they get 100 basis points under their belt then decide it’s time to take stock."

Eric Swanson, who spent 16 years at the San Francisco Fed, agreed that a soft landing appears intact. "It's unlikely that the data will take a turn that strongly. So I think everything's going to be gradual."