Fed Poised for Trimming Rate Twice This Year Amid Economic Uncertainty

The U.S. central bank is widely expected to lower its benchmark interest rate twice more before the end of the year, signaling a shift in focus toward supporting the job market despite lingering inflation concerns. This forecast, gathered from a recent survey of economic experts, suggests a quicker pace of cuts than anticipated just a month ago.

Prioritizing the Labor Market

Most economists now project the Federal Reserve will announce a quarter-point rate reduction next week and follow up with a similar cut in December. This outlook aligns with recent statements from central bank policymakers, including the Chair, who have indicated a greater emphasis on the health of the labor market. The decision to prioritize this comes as the central bank navigates the delicate balance between the risk of elevated inflation and a potential further slowdown in the jobs sector. It follows a prior rate cut last month, the first in nearly a year.

While the majority of experts agree on the two upcoming cuts this year, financial markets are even more convinced, with traders having already factored these reductions into futures contracts.

A Blurry Economic Picture

The economic outlook, however, remains obscured by a prolonged government shutdown, which has delayed the release of crucial official data on both employment and inflation. Experts note that central bank officials are deeply divided, with roughly half focused on the labor market and the other half concerned with inflation risks. Compounding the difficulty is the lack of clarity on whether any slowdown in hiring reflects weaker labor demand or tighter labor supply, a distinction that has significant implications for how monetary policy should be shaped.

Deep Division on Next Year’s Path

Looking further ahead, the consensus breaks down dramatically. Economists are heavily split on where interest rates will stand by the end of next year, reflecting significant uncertainty about the future direction of policy.

Despite this division, a large majority of surveyed economists believe the greater risk is that the central bank will ultimately cut rates too low by the end of the current cycle. This increased uncertainty is partly fueled by speculation surrounding the possibility of a new central bank chair when the current term ends next May. Meanwhile, inflation is projected to remain slightly above the central bank’s long-term target of 2% for the next few years, adding another layer of complexity to the policymaking challenge.