This week, the Federal Reserve signaled that it not only expects to keep a lid on future interest rate hikes but is even open to rate cuts next year. Morningstar’s chief U.S. economist is predicting the central bank will axe rates six times in 2024.
“In addition to the first cut in March 2024, we’re expecting a total of six cuts for the whole year,” said Morningstar’s Preston Caldwell in a new podcast.
“I think ultimately the Fed will be quite expeditious next year in bringing rates down, and it will do so in time to avoid a recession,” he added.
Specifically he thinks the central bank will bring the federal funds rate from a current target rate of 5.25%-5.50% down to a target range of 3.75%-4.00%.
“So that’s a 150 basis point reduction from current levels by the end of 2024. And then we’re expecting further cuts, another 150 basis points of cuts in 2025, taking the federal funds rate down to 2.25% by the end of that year.
The Fed will continue cutting rates, down to a federal funds rate of as low as 1.75% in 2025, he added.
“So that’s taking the federal funds rate really all the way back down to about pre-pandemic levels. Long-term rates should fall accordingly, and that will help ensure that the economy grows at its full potential,” he said.
He said a soft landing for the economy—if not certain—is very possible and a recession can be avoided, even after persistent fears that inflation was going to be too aggressive for the Fed’s 11 rate hikes to subdue.
Contrary to what many people expected a year or so ago, “inflation has come down quite dramatically. I mean, in the last six months, the [Personal Consumption Expenditures] core inflation index is now below 3.0%. And on a year-over-year basis, it’s at 3.5%. We expect that to fall further, eventually hitting about 2.4% by March 2024, which is when we expect them to start cutting, actually.”
The supply side of the economy, including the labor markets and global manufacturing and logistics, have made it possible to subdue inflation without a recession, he added.