MNI: Fed SEP To Show Two '24 Cuts, Slower Growth- ExOfficials

The Federal Reserve will likely lower its median "dot plot" estimate for policy interest rates at the end of 2024 to around 4.9%, former officials and staffers told MNI, as expectations build for the first rate cut to come as early as the first half of the year.

"My expectation is that the median will probably show two 25-basis-point cuts next year," said ex-Boston Fed chief Eric Rosengren, whose own forecast is for two to three cuts starting as early as the second quarter. "I assume that they don't want to do anything to cause financial conditions to ease so much that the Fed actually can't ease next year."

Ex-Atlanta Fed President Dennis Lockhart said: "It’s conceivable next year’s median falls materially, but I’m doubtful that it will fall 100 to 125 basis points as some are expecting."

"I don’t think they are quite ready to encourage this view that they are going to pivot early in the year and implement a series of cuts," Lockhart said. "Unless the economy gets into trouble, I’m inclined to think they will risk some deterioration in order to be certain inflation is controlled, by exercising patience before starting to cut."

HAWKISH TONE

All 19 members of the FOMC will make their individual projections and taken together they are expected to maintain a hawkish tone, the ex-officials said. Still, the Fed may struggle to restrain ebullient markets as the central bank holds steady for the third consecutive meeting in a range of 5.25-5.5% and indicates that it expects continued disinflation and rate cuts next year. The Fed is "going to be especially wary about raising expectations for lowering rates," said ex-Richmond Fed economist Peter Ireland.

Priya Misra, a former member of NY Fed advisory committees, told MNI's FedSpeak that lower inflation would justify two rate cuts next year, but that there's a risk the Fed might indicate it expects only one.

"Do they keep two cuts in 2024 or make it one cut? One ease might seem very hawkish, it’s very hawkish relative to market pricing, but actually it’s offsetting the fact they didn’t hike in 2023," she said, referring to Fed's September SEP which had indicated another hike. "I’m worried the Fed might go into the meeting thinking one cut in 2024 might be neutral, I think it will be considered hawkish because the market believes many more cuts than the Fed has projected."

Some ex-officials said 125 to 150 basis points of cuts would be reasonable in scenarios with faster-than-expected disinflation, but the Fed is unlikely to pencil it in as their baseline scenario this week. (See: MNI INTERVIEW: Five Fed Cuts In 2024 Are 'Plausible' -Wilcox)

"I expect the Fed will be cautious and pencil in significantly fewer cuts than the market is currently discounting in the hope of preventing further rapid easing of financial conditions," said Krishna Guha, a former executive vice president at the New York Fed.

Rick Roberts, a former New York Fed executive, said he expects Powell will provide a hawkish message signaling that the Fed is unlikely to loosen policy in the near term, given its desire to get inflation to 2%. "Markets may adjust sharply downward in response, but this is probably an acceptable outcome from the Fed's perspective, given the recent run-ups."

INFLATION STEPDOWN

The economy next year will "grow rather weakly, which is quite consistent with an inflation forecast that continues to make reasonable progress towards getting to 2% inflation," said Rosengren.

"We'll definitely see core PCE inflation in the first quarter that's likely to be below 3%," he said. "That starts providing the appropriate conditions for talking about some gradual easing, but I don't think the Committee is likely to ease as aggressively as markets have currently priced in."

Still, the former officials expect no significant change in tone from the December FOMC statement. "The key message is it remains to be seen whether the stance of policy is restrictive enough to complete the job," Lockhart said. "‘Powell may hint at a satisfactory inflation trend developing, but I think at this juncture he will try to keep options open and stake out more of a stay-the-course position."