Goldman Sachs global head of trading strategy Joshua Schiffrin predicts that the Federal Reserve will initiate a series of four interest rate cuts starting in March to help bring inflation in line with the central bank's two percent target.
“I believe very much in a March cut,” Schiffrin said. “I think they recognize there are a lot of benefits to starting on the sooner side – they can then likely go gradually and speed up the pace of cutting if the economy really weakens but such a plan would reduce the chance they get meaningfully behind the curve. And of course, they can always stop the cuts at a still restrictive level.”
A year ago, Schiffrin accurately predicted a soft landing, defying concerns of high inflation and an impending recession. He maintained optimism, and ultimately, the economy proceeded as the consumer price index dropped from 6.4 percent to 3.4 percent.
Schiffrin acknowledges that some of his 2023 projections fell short, as he had underestimated the magnitude of the Fed's rate hikes and incorrectly predicted the Bank of England as the first major central bank to lower rates. His call for the Japanese yen to strengthen against the dollar also proved inaccurate. Despite these misjudgments, he anticipates the next 20-basis-point shift in US yields to be upward, aligning with the ongoing steady growth trajectory.
As the Fed begins cutting rates, Schiffrin expected its European and U.K. counterparts to follow suit. In contrast, he predicts the Bank of Japan will deviate from the trend, opting to raise rates in April.
Differing opinions
Schiffrin's sentiment is not echoed by the majority of economists polled by Reuters. They predict the Fed will delay interest rate cuts until the second quarter. June is considered more probable than May, and the level of easing expected this year is lower than current market expectations.
Out of all 123 economists participating, all anticipate the Federal Open Market Committee to maintain the rate at 5.25-5.50 percent on the January 31 meeting. Fifty-five predicted rate cuts to begin in June, while 31 opted for May. Only 16 expect a cut in March, while the rest anticipate the Fed responding to cooling inflation with rate cuts in the second half of the year.
Meanwhile, federal funds futures priced in the first cut to be in May. Initially, markets indicated a 90 percent chance of a move in March, but recent data and comments from Fed officials tempered early rate cut expectations.
The median prediction maintains the year-end fed funds rate at 4.25-4.50 percent, consistent with last month. Almost 60 percent of the survey participants (72) foresee cuts of 100 basis points or less in the current year, less than market expectations of over 125 basis points which has been reduced from 150 just a week ago.
However, according to JPMorgan Research, the Fed is expected to implement a 125-basis-point cut in the latter half of 2024. This projection is an increase of 25 basis points compared to their outlook published last month.
The Reuters poll indicates that inflation, measured by personal consumption expenditure (PCE), is expected to average around the two percent target in the second half of 2024. This is a decline from the 2.6 percent observed in November. However, alternative inflation measures such as the consumer price index (CPI), core CPI and core PCE are anticipated to remain above two percent at least until 2026.
JPMorgan analysts anticipate core inflation will ease to 2.4 percent in 2024 and 2.2 percent in 2025, ultimately returning to the 2 percent target in 2026.
