As of August 19, 2024, a slim majority of economists surveyed anticipate that the U.S. Federal Reserve will implement three 25 basis point rate cuts during its remaining meetings in Q3 2024—one more than previously expected. This shift in forecasts follows a weaker-than-expected U.S. jobs report in July, which initially led interest rate futures traders to price in up to 120 basis points of cuts in 2024, although this has since adjusted to around 100 basis points.

A brief but intense market sell-off, triggered by a sudden rise in the Japanese yen and subsequent unwinding of large leveraged positions, also contributed to the more aggressive rate cut expectations. While some Fed officials have hinted at upcoming rate reductions, most economists in the August 14-19 Reuters poll do not foresee a rapid series of cuts. Recent economic data, including a strong retail sales report, suggests the economy remains relatively robust even as inflation continues to decline.

According to 54% of the economists polled, the Fed is expected to cut the federal funds rate by 25 basis points in each of its meetings in September, November, and December, bringing the range to 4.50%-4.75% by the end of 2024. Previously, markets were anticipating a half-percentage-point cut in September, but are now pricing in about a 70% probability of a quarter-point cut next month.

Of those surveyed, 34 economists predicted two rate cuts for this year, while one respondent forecast only a single reduction. Additionally, 11 economists anticipated rate cuts totaling 100 basis points or more.

"The basis for the cuts that we have is mostly because inflation is coming down. It's not so much that activity is slowing ... We see a pretty resilient economy that's growing near trend and with that, we think inflation only ebbs gradually," said Jonathan Millar, senior U.S. economist at Barclays.

Inflation measures, including the Consumer Price Index (CPI), core CPI, personal consumption expenditures (PCE) price index, and core PCE, are expected to remain above the 2% target until at least 2026. Despite easing inflation, wage growth has stayed above the 3.0%-3.5% range, which is considered consistent with the Fed’s 2% inflation target.

Looking ahead, the Fed is projected to implement a 25 basis point cut each quarter throughout 2025, with markets currently pricing in approximately 200 basis points of reductions by the end of Q3 2025.

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