Market Views: How many US rate cuts will we see in 2024?
Investors are anticipating a policy shift from the Federal Reserve after Chair Jerome Powell signalled on August 23 that interest rate cuts may begin soon.
"The time has come for policy to adjust," Powell said in a highly anticipated speech to the Kansas City Fed's annual economic conference in Jackson Hole, Wyoming. "The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."
With its policy rate currently in the 5.25%-5.50% range, the Fed has "ample room" to reduce borrowing costs to cushion the economy, Powell said.
Powell indicated that the Fed would not tolerate further increases in unemployment, which has already risen rapidly to 4.3%, primarily due to slower hiring rather than a more alarming surge in layoffs.
"We do not seek or welcome further cooling in labour market conditions," he said. "We will do everything we can to support a strong labour market as we make further progress toward price stability."
Following Powell's Jackson Hole speech, AsianInvestor asked asset managers about their expectations for the Fed's actions in the remainder of 2024, specifically regarding the number and size of potential interest rate cuts.
The following responses have been edited for brevity and clarity.
Gurpreet Garewal, macro strategist for fixed income and liquidity solutions
Goldman Sachs Asset Management
Powell’s speech featured three key dovish elements: confidence in inflation receding, concern over increased downside risks to the labour market, and limited tolerance for further labour market cooling.
Our base case is for the Fed to deliver an initial string of three consecutive rate cuts in September, November, and December.
With the inflation emergency over, the magnitude of these rate cuts will be determined by the evolution of the labour market.
Current data support 25bps rate adjustments, but evidence of further weakening in the labour market could raise the prospect of a 50 basis point cut.
For investors, a Fed committed to extending economic expansion creates a supportive backdrop for earning income across fixed income sectors.
At the same time, a benign inflation backdrop and increased focus on downside growth risks reinforces the value of balancing risk asset exposures with bonds. Bonds have demonstrated stability during market volatility, as seen during the regional banking crisis last year and earlier this month.
Unlike the last cycle, this balancing property for multi-asset portfolios is achievable due to higher starting yields and the return of the negative bond-equity correlation.
Peter Graf, chief investment officer
Nikko Asset Management Americas
We think the Fed is most likely to cut rates 25 basis points at each of the three remaining 2024 FOMC meetings, disappointing the market relative to current expectations for at least one larger cut.
These dovish expectations were baked in after the July payrolls report and reinforced by Chair Powell’s Jackson Hole statement that they “do not seek or welcome further cooling in labour market conditions”.
Given the trends across a variety of employment indicators, the chances of avoiding further cooling seem highly unlikely, suggesting an impetus for larger cuts.
However, the Fed is weighing its desire to stabilize the labour market against the signalling downsides to cutting by more than 25bps. Larger cuts would give the impression that they are behind the curve, raising investor anxiety about a slowdown.
Around the presidential election, aggressive easing could also expose them to criticism that they were politically motivated to support the incumbents or curry favour with the president elect.
Most telling for us was the valedictory tone of Powell’s Jackson Hole speech where he recounted the arc of inflation over the post-pandemic era.
The perfect coda to vanquishing inflation would be a steady and normal cutting cycle.
Hussain Mehdi, director of investment strategy
HSBC Asset Management
Jerome Powell’s Jackson Hole speech appeared to seal a September rate cut.
The only question now seems to be whether it will be a 25 basis point or or a 50 basis point move, with labour market developments likely to be the determining factor given Powell’s comment that the Fed does not “seek or welcome further cooling in labour market conditions”.
Clearly, the Fed has been caught out by the recent softening in labour market data, particularly July’s tick up in the unemployment rate to 4.3%, leaving it 0.3 percentage points above the Fed’s end-2024 forecast.
A further increase in August’s print, released in early September, and the Fed is likely to opt for a 50 basis point move.
However, the slightly more likely outcome is a 25 basis point move, given some temporary factors probably boosted the unemployment rate in July and these may partially unwind in August.
Nonetheless, with inflation risks having receded and labour market risks having increased, the Fed needs to deliver a series of back-to-back rate cuts to get policy back to a more neutral setting in a timely fashion.
We see the funds rate falling to 3.50% by mid-2025 with the risk of more aggressive action.
Peiqian Liu, Asia economist
Fidelity International
The focus has now clearly shifted to the labour market where increasing signs of weakness weighs on the Fed’s policy mandate.
To avoid further cooling of the labour market, the Fed now must remove some policy restrictiveness.
Going forward we expect a gradual further loosening of labour market conditions alongside a continuation of the recent disinflationary trend.
However, we do not see the economy falling into an immediate recession.
Consumption growth has slowed to a more normal trend pace. Household and corporate balance sheets are healthy.
A soft-landing outcome over the coming months remains our base case, therefore we expect the Fed to deliver two cuts this year in September and December respectively.
Marc Franklin, managing director & senior portfolio manager of asset allocation, Asia
Manulife Investment Management
Fed Chair Powell’s speech at Jackson Hole signalled that the Fed has effectively pivoted from prioritising a reassertion of control over inflation towards maintaining the growth cycle and, specifically, attempting to ensure that the labour market remains resilient.
The recent rise in the US unemployment rate and softening non-farm payrolls has clearly garnered the attention of Chair Powell.
With respect to monetary policy developments from here, our base case at Manulife is for three rate cuts of 25 basis points each between now and the end of 2024.
We suspect that the Fed would require concerning evidence of an accelerated softening of the labour market and the broader growth picture to move to a 50 basis points rate cut increment since financial markets would likely – and rightly – interpret such a move as being motivated by heightened worry over the growth outlook for the US economy.
The decision therefore would not be taken lightly.
Dwyfor Evans, head of Asia Pacific macro strategy
State Street Global Markets
Chair Powell provided confirmation that interest rate cuts are likely to begin in September with the simple statement that “the time has come for policy to adjust.”
However, he did not settle the debate over the magnitude of easing and its cadence even if the debate has now shifted from inflation to weakness in the labour market.
The Fed will remain data-dependent, but the bar is lowered for more aggressive policy action, particularly as it seems willing to overlook inflation volatility.
This has potential shorter-term policy implications if the labour markets continue to weaken.
The dots will be adjusted in September, and we think the data will need to further deteriorate in order to see the four cuts priced by year-end. That said the Fed will begin its easing cycle with a 25 basis point cut next month, to be followed by potentially two more 25 basis point cuts for the remainder of the year, pending incoming data.
Luke Bartholomew, deputy chief economist
abrdn
Jerome Powell’s much-awaited speech at the Jackson Hole conference didn’t disappoint.
The Fed chair was clear that “the time has come” to cut and he struck a dovish tone, emphasising that any further weakening in the labour market would be unwelcome and sounding close to declaring victory on inflation.
The speech provided little guidance on the pace or size of cuts, but Powell emphasised that the Fed could move quickly if needed, flagging “ample” room for easing.
These signals clearly keep the option for 50bps moves open and presented little pushback to markets that are pricing at least one 50 basis point cut this year.
Certainly, last week’s 818,000 downward revision to payrolls through March 2024 will have caught the Fed’s eye, but these data are from the past, and the central bank will be most focussed on the upcoming August labour report.
Another ugly reading could persuade us to upgrade our expectations for September to a 50 basis point cut from 25 basis points.