Powell surprises with a dovish turn; economists debate how many Fed rate cuts in 2024

The first dovish signals came in the Fed’s statement and economic forecasts at 2 p.m. Eastern. First, the Fed penciled in three rate cuts in 2024 instead of two that were projected in September. The Fed also softened its tightening bias by saying they were mulling the need for “any” more hikes.

Then, half an hour later at his press conference, “Chair Powell did nothing to undo the impression of those signals,” said Feroli, in a note to clients. Powell said Fed officials were starting to discuss when to cut rates.

“The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at out meeting today,” Powell said. Fed officials think the Fed is “likely at or near the peak rate for this cycle.”

While Powell didn’t take rate cuts “off the table,” they are “collecting dust,” said Michael Gregory, deputy chief economist at BMO Capital Markets.

Markets reacted with the 10-year Treasury yield
BX:TMUBMUSD10Y
falling to 4.025%.

Traders in derivative markets now see an 80% chance of the first rate cut in March, and now see five quarter-point cuts next year.

Matt Luzzetti, chief U.S. economist at Deutsche Bank, said the main thing learned from Wednesday’s press conference was that Fed Gov. Chris Waller’s dovish comments a few weeks ago were a reflection of the mainstream view at the central bank, rather than a dovish outsider.

In a speech late last month, Waller raised the possibility of a rate cut by spring if inflation keeps slowing.

Some economists think that March is too soon for a rate cut.

“We still judge rate cuts will commence later rather than sooner, still by the end of the third quarter of 2024,” Gregory of BMO Capital Markets said.

Feroli said he now sees the first rate cut in June, instead of his prior forecast of July, and predicted that the Fed will cut five times by the end of 2024.

Luzzetti of Deutsche Bank sees six rate cuts next year, but not beginning until June as the economy falls into a mild recession.

The Fed doesn’t forecast a recession. Its rate cuts are purely a story of weakening inflation. If there is a recession, the Fed will cut very fast, Luzzetti said.

Diane Swonk, chief economist at KPMG, said the odds of a recession are lower now that the Fed has signaled it will actively take steps to try to avoid one.

The Fed wants the economy to cruise at a lower altitude, and no longer wants a landing, Swonk said in an interview.

That is a 180-degree turn from Powell’s speech in Jackson Hole, Wyo., in the summer of 2022 when he spoke for less than 10 minutes but warned of “pain” and the unfortunate costs of fighting inflation. That speech, “a bucket of ice water,” Swonk said, sent the stock market reeling at the time.