The U.S. Federal Reserve is set to implement two significant interest rate cuts by the end of 2023, according to a recent Reuters poll of economists. The anticipated reductions are influenced by a delicate balance between inflation concerns and labor market instability.
Upcoming Rate Cuts Expected
Economists predict a 25 basis point cut in the key interest rate during the upcoming Federal Open Market Committee (FOMC) meeting on October 29, followed by another reduction in December.
- Current interest rate forecast: 3.75% – 4.00% after cuts.
- Majority of economists, 115 out of 117, support these cuts.
- 71% of respondents foresee a second cut in December.
Economic Factors at Play
The shift in expectations comes amidst ongoing debates within the Fed, where members are divided on focusing primarily on labor market health versus inflation risks. Federal Reserve Chair Jerome Powell has emphasized the importance of job market conditions.
As the government shutdown, which has lasted three weeks, delays critical data releases, uncertainty in economic outlook persists. Recent trends indicate modest hiring and layoffs, suggesting a stable but cautious labor market.
Inflation and Employment Outlook
According to the latest projections, the unemployment rate is expected to average around 4.3% through 2027, while inflation is anticipated to stay above the Fed’s target of 2% over the same period. This comes as consumer inflation reportedly increased to 3.1% last month, up from 2.9% in August.
Potential Risks Ahead
While there is a consensus on the need for rate cuts, economists express caution about the potential risks of overstepping. A significant number fear that the Fed might lower rates too aggressively, potentially jeopardizing its independence.
- 76% of surveyed economists view the risk of excessively low rates as concerning.
- Debates continue regarding inflation dynamics and labor market conditions.
As speculation rises regarding the future leadership of the Federal Reserve, attention remains on how upcoming monetary policy decisions will navigate the complexities of inflation and employment challenges.
