Fed will cut rates, but question is how often and how much

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Continuing the shift in sentiment, all 37 of the economists surveyed by Wolters Kluwer now think the Federal Open Market Committee will reduce short-term rates at its September meeting.

The result marks a change from prior surveys. In August, 93% of respondents expected the first rate cut at the Sept. 18 meeting, while for July, 55% of the 49 economists polled thought the first rate cut would take place then. The June survey found 61% of respondents believing September would bring the first rate cut of the upcoming cycle.

A small difference of opinion exists on how big the rate cut would be. The latest poll found that 86% expect the FOMC to reduce the Fed Funds Rate by 25 basis points, and just 14% predict a larger 50 basis point cut.

At the time of the Wolters Kluwer report, written prior to Wednesday morning's release of Consumer Price Index data, the Fed Funds Rate futures market gave a 27% chance for a 50 basis point cut.

"August CPI data likely reinforces the markets' belief that the Fed can prioritize maximum employment over price stability going forward," said Sam Williamson, a senior economist at First American Financial, in a Wednesday morning statement.

First American economists are not current participants in the Wolters Kluwer survey. "The likelihood of a 25 basis point cut next week has jumped to 85%, aligning with the Fed's base case," Williamson said.

In comments also issued after the CPI release, only 15% of the futures market are currently expecting a 50 basis point cut next week, Louis Navellier, an investment banker, said.

A stock sell-off took place (the Dow Jones Industrial Average was 400 points lower at noon) on the CPI news. Navellier called that activity a surprise because the CPI news reduced the need for a larger reduction. 

"Some investors were more concerned that a 50 basis point cut would be a recession warning signal by the Fed," Navellier said. "Perhaps it [the sell-off] is a concern that the stickiness of inflation may lead to a slower path in the rate reduction by the Fed."

The Wolters Kluwer survey consensus is for a 76 basis point decline in the Fed Funds Rate target in the rest of this year (including the likelihood of two 25 basis point cuts in the November and December meetings) and for 117 basis points for 2025. It also gives a 31% probability that the U.S. will enter a recession in the next 12 months, up just slightly from 29% in the June survey.

An indicator for a potential recession, the inverted yield curve, where the 10-year Treasury yield was lower than the 2-year, has reversed in recent days. 

In the post-CPI release comments, First American expects the Fed to be more aggressive the rest of this year.

"Meanwhile, markets are split on whether the Fed will cut rates by 100 or 125 basis points by year-end, with the former slightly favored after today's CPI data," Williamson said. "Assuming a 25-basis point cut in September, the Fed would then need to follow with rate cuts of additional 75 or 100 basis points respectively in November and December."

Housing costs remain "the biggest sticking point" in the CPI data, Williamson said. Owners' equivalent rent was up 0.5% on a monthly basis and 5.4% annually.

However, Corelogic Home Price Index data released Wednesday morning found values declined by a very scant 0.01% in July from June. They grew for the 50th consecutive month on an annual basis, at 4.3%.

This is down from a 4.7% year-over-year improvement in June and the third month in a row it was under 5%.

But the anticipated FOMC action may help to improve consumer home purchase sentiment in a market where buyers remain cautious because of elevated mortgage rates and rising prices, Corelogic said.

"July's prices were essentially flat from the month before, which was notably cooler than the average gain of 0.4% recorded between June and July in years prior to the pandemic and especially during the pandemic," said Selma Hepp, chief economist for Corelogic, in a press release. 

"The question for home prices going forward is whether the upcoming rate cut from the Fed and expected continuation of falling mortgage rates will be sufficient to motivate potential homebuyers who may start to fear [a] cooling labor market and continued uncertainty of a soft landing, along with anticipation around the presidential election."

Normal seasonal housing patterns, even with lower mortgage rates helping affordability issues, is likely to end up without a significant surge in activity, Hepp said.

All 50 states reported higher prices on an annual basis, Corelogic found.

Going forward, prices were expected to rise by 0.2% between July and August, and by 2.2% through July 2025.


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