October’s National Association for Business Economics (NABE) survey found forecasters still hoping for a Fed funds rate cut or cuts in 2024, even though about half think 2% inflation won’t be reached by then.
Most of the 40 economists on the NABE’s economic outlook panel also indicate they think the Fed has reached the apex of its current rate-hiking cycle.
One-third of the economists surveyed (in late September) expect the first Fed funds rate cut in the first quarter of 2024, and nearly 25% chose the second quarter. There was widespread disagreement over the extent of the rate cuts, but the median forecast was for Fed funds to fall to 4.375% by year-end 2024.
In expecting rate cuts, the economists were not suggesting inflation would be defeated.
Inflation will further slow next year, excluding food and energy costs, according to the NABE panel. But less than half think the core personal consumption expenditures (PCE) price index — the Federal Open Market Committee’s (FOMC) preferred inflation gauge — will converge to the Fed’s 2% target next year. A slightly larger number (54%) indicates inflation won’t fall to 2% until 2025.
At the median, the NABE panelists project core PCE inflation to be at 2.3% for the fourth quarter of 2024, about 1.5 percentage points lower than August’s reading. September PCE data arrives on Friday.
Neither do economists expect the U.S. economy to plunge into recession, forcing the Fed to lower interest rates. Six in 10 NABE panelists assign a less than 50% chance of a recession in the next 12 months.
The panel of economists predicts economic growth will slow next year. While U.S. GDP growth was 4.9% last quarter and 2% GDP growth is forecast for this quarter, respondents to the NABE survey project real GDP to grow only 1.1% between now and the fourth quarter of next year.
According to the NABE, the decline in consumer spending and exports and limited restocking of inventories will contribute to the slowing economy. While U.S. fiscal policy will boost growth somewhat, the resumption of student loan payments will detract from it.
Likewise, NABE economists expect an increase in the unemployment rate next year, but not a big one. The average forecast for the unemployment rate for 2024 was 4.2%. Only 14% predict unemployment will rise above 5% next year.
“A few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.”
Chair of the Federal Reserve
Impetus for Cuts
When asked what economic signals will prompt the FOMC to loosen monetary policy in 2024, 38% of the economists chose “general confidence that inflation will continue to slow to target at some point in 2024.” Nearly 20% said a spike in unemployment rates or “extremely negative payroll prints.” Less than 15% chose a severe U.S. recession.
The FOMC could conceivably trim the Fed funds rate before it achieves the 2% mark. However, 26% of the NABE panelists said the Fed’s target should be 2% exactly. Another 26% think the Fed should be more flexible — targeting a range of 2% to 4%.
Laurence Ball, a professor of economics at Johns Hopkins University, told CNBC in February that “there’s no evidence that 3% or 4% inflation does substantial damage relative to 2% inflation.”
Thus far, Fed Chair Jerome Powell is keeping his comments hawkish. The October NABE survey was taken about a month before Powell’s October 20 speech at the Economic Club of New York in which he said, “A few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.” He reiterated that the FOMC was committed “to bringing inflation down sustainably to 2%.”
The NABE panel’s interest rate outlook resembles but doesn’t match the probabilities implied by current 30-day Fed funds futures pricing.
The first significant chance of a 25-basis-point reduction in the Fed funds rate (26% probability) isn’t until May 2024 (the middle of the second quarter), according to futures pricing, and the chance of a rate cut isn’t higher than the chance of the Fed standing pat until June 2024.