Fed may cut rates 5 times in 2025: Economist


S&P Global Ratings has raised its US GDP growth forecast for 2024 based on a strong finish to 2023, with falling inflationary pressures. The agency has also weighed in on the likelihood of interest rate cuts from the Federal Reserve. S&P Global Ratings Global Chief Economist Paul Gruenwald joins Yahoo Finance to discuss the agency’s forecasts and how the Fed will make policy decisions moving forward.

Regarding rate cuts projections, Gruenwald states: “We get three this year, maybe five next year. If we kind of land three-ish we’re close to done unless the — if the labor market tanks, that’s the downside scenario, then the Fed has a lot of space to cut. Now they would do that. In the baseline it’s going to be gradual and as we get inflation back to two [percent]. “

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Editor’s note: This article was written by Nicholas Jacobino

Video Transcript

It’s great to have you here–

Morning.

At the desk with us so. Talk to us just about why you’re a bit more optimistic, at least when it comes to growth here in the US.

Yeah, the US is really outperforming the rest of the advanced countries. So last year, on average, growth in those countries fell by 2-and-1/2 percentage points– actually picked up in the US. So we’re seeing a boost in productivity.

We’re also seeing a boost in investment. So the Inflation Reduction Act, which is the government’s energy transition push is crowding in private investment. So all this is lifting the growth profile in the US.

On top of that, you get strong services and labor market. And we’re going to have another year of 2-and-1/2 percent growth this year, it looks like.

What does that do for the view on policy rates from your perspective as well?

Yeah, well, we’ve always been in the higher-for-longer camp, and now it’s a slower-for-longer camp. The markets, as we know, keep pushing and hoping that it happens faster. At one point, I think, the market had six rate cuts priced in for this year.

Powell has been very clear. Christine Lagarde at the ECB has been very clear. They’re going to be patient and make sure that we’re down on a path toward two. We think the Fed goes with the first cut around the middle of the year, maybe three cuts this year.

But I think what’s emerging is that they may not go as far as we’ve been thinking because the neutral rates, the ultimate landing rate, may have gone up. Pre-COVID in the US, that was 2-and-1/2. Now, we think it’s closer to 3. And then in Europe, it was 1-and-1/2. Now, it’s 2-and-1/2.

So this global interest rate or the global equilibrium interest rate, if you will, has ratcheted up.

So then what does that tell us for cuts then in 2025?

Yeah, well, we get three this year and maybe five next year. But if we land three-ish, then we’re close to done unless– if the labor market tanks– that’s the downside scenario– then the Fed has a lot of space to cut now. They would do that.

But in the baseline, it’s going to be gradual and as we get inflation back to 2.

And there would have to be a reason for five cuts to come next year as well. What is the severity of, perhaps, some of the impact to the economy that you’re anticipating in that five-cut call for 2025.

Right. Well, the US has to slow down if you think this is a 2% economy, and we’ve got to take a little bit of demand pressure out to get inflation down to the 2% target. We’re not going below two. Last year, every quarter printed above two. Looks like Q1 is going to print above two.

So at some point, and this is actually our forecast, second half of this year we’ve got to slow down a bit. The Fed doesn’t have to wait for inflation to get to two to start cutting. So financial conditions are relatively tight now. When they’ve got the clear path to two, then they’re going to start gradually taking the tightness out of the system.

Well, why do you think it’s been so tough to get inflation under control? We talked about that last night if maybe it is higher than what the Fed’s target is– just around 2% here when we talk about all the changes that have happened within the economy.

But why has it been as sticky as it has been up until this point.

Yeah, it’s a little bit of a mystery, if you will. By the way, the Fed moved off of zero about two years ago on Saint Patrick’s Day in 2022, and then they haven’t they haven’t moved since last May. So it’s really been the labor market.

The labor market is a big surprise. If you asked most economists two years ago where would we be if the Fed went 525 basis points off of zero, no one would be calling for a 3.9% unemployment rate and growth above two for the whole year. So we’ve just had this resilience, which is surprising and good in a way. We’ve still got something close to full employment.

But that’s what’s been so tough. It’s the core services inflation that’s really the issue here.

What’s the core knock to that resiliency– the key that you’re tracking to see whether or not consumers do start to show larger cracks in this?

Yeah, we’re watching the labor market very, very closely, and particularly the services. That’s the key to the whole story.

S&P Global’s Paul Gruenwald Paul. Great to see you here in studio with us.

My pleasure, guys.



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