Economists Believe Fed Will Keep Interest Rates at Highest Level Until July 2024

The U.S. central bank will delay reducing interest rates at least until July 2024, which will provide less relief than financial markets expect, predict leading economists surveyed by the Ft.

Although most respondents thought that the phase of raising interest rates in the Federal Reserve’s historic monetary campaign is now over, nearly two-thirds of respondents believed that the central bank will only begin to lower its benchmark rate by the third quarter of 2024 or even later.

Three-quarters of surveyed economists also expect the Fed to lower the federal funds rate from its current 22-year high of 5.25-5.5 percent by only half a percentage point or less next year.

This is a much smaller move than what Wall Street is betting on, with traders increasing bets that the Fed will start to reduce as early as March.

The survey, which involved 40 economists, was conducted in partnership with the Kent A Clark Center for Global Markets at the Booth School of Business at the University of Chicago and highlights differences in views on how the Fed controls inflation amid the slowdown of the world’s largest economy.

Fed officials and other central banks in advanced economies are now grappling with how long to keep high interest rates to curb household and business demand – and when they can start to reduce borrowing costs.

-I still see a lot of momentum for the economy, so I don’t see the need to lower rates immediately, and I don’t think the Fed plans to do that either – said James Hamilton, an economics professor at the University of California, San Diego, who participated in the survey.

Robert Barbera, director of the Center for Financial Economics at Johns Hopkins University, said the Fed will need to see both stable improvements in inflation and a significant reduction in labor demand before considering lowering interest rates.

In the past five months, the U.S. economy has created an average of 190,000 new jobs per month — a pace that Fed Governor Christopher Waller recently noted is close to the 10-year average since 2010, but still higher than needed to absorb all the workers entering the labor force.

Laura Coroneo, an economist at the University of York, expressed concern about potential high oil prices and their impact on the pace of falling inflation.

OPEC Reduces Production

OPEC+ countries recently agreed to cut crude oil production in 2024 in an attempt to raise oil prices. The ongoing war in Ukraine and the escalation of conflicts in the Middle East have also raised fears of further inflation in energy costs. Most surveyed economists considered it unlikely that the Fed’s preferred inflation gauge — the personal consumption expenditures price index, excluding food and energy prices — would remain above 3 percent by next December, but they expected it to exceed the central bank’s target of 2 percent at that time. Their median estimate for the end of 2024 was 2.7 percent, while the ‘gauge’ recorded an annual increase of 3.5 percent in October.

According to the median estimate, economists predicted U.S. gross domestic product growth, adjusted for inflation, of 1.5 percent next year, which is significantly below what it has been so far this year. With interest rates held at elevated levels for a longer period, economists also do not expect immediate changes to the Fed’s plans to reduce its balance sheet of nearly $8 trillion.

More than 60 percent of surveyed economists believe that the central bank will not slow its quantitative tightening program until the third quarter of 2024 or later. As part of its efforts to tighten financial conditions in the economy and reduce demand, the Fed has aimed to reduce its assets by up to $95 billion per month since September 2022.

Most economists did not believe there was a significant chance of a recession starting next year, while just over half said there was at least a 50 percent chance that a recession would begin in the third quarter of 2025 or later.