Fed signals US rate cuts & slightly higher rates for longer
The FOMC expects to cut rates at a faster pace than implied by a policy rule relying on its own economic forecasts.
The Fed has signalled it still plans to cut rates three times this year, but now expects rates to stay a little higher for longer, factoring in a funds rate about 25bp higher than previously expected through 2025 and 2026.
This is despite a slight upward revision to forecast core inflation this year, where the updated FOMC profile for a falling funds rate is at the low end of the range of estimates from an inertial Taylor rule based on the Fed’s economic outlook and a range of realistic assumptions for the NAIRU and the neutral interest rate.
Surprisingly, the updated Fed outlook shows a more pronounced disconnect between strong growth and unemployment, where consistently strong, above-trend growth has no material effect on unemployment, which is expected to broadly match the estimated NAIRU of 4.1% over the entire forecast profile.
The Fed's estimate of the neutral rate was revised slightly higher in the short term to 3.1%, but only marginally higher in the long run to 2.6%.
More specifically, the Fed forecasts showed:
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The number of forecast rate cuts was unchanged in 2024, with rates slightly higher for longer thereafter.
The median FOMC forecast profile still has about three 25bp-sized rate cuts for this year, three in 2025 (previously four cuts), and three in 2026 (unchanged). As a result, the funds rate is about 25bp higher over 2025 and 2026 than previously expected.
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The Fed's estimates of the neutral rate were revised a little higher.
The median FOMC estimate of the short-run nominal neutral policy rate – as proxied by the expected funds rate at the end of the forecast horizon – was revised up from 2.9% to 3.1% (this was the highest short-run estimate since 3.4% in mid 2023). The long-run estimate was revised marginally higher from 2.5% to 2.6%, with the central tendency – i.e., the range excluding outliers – still skewed to the upside at 2.5-3.1% (previously 2.5-3%)
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Core inflation is expected to be slightly higher in 2024.
Core inflation was revised slightly higher to 2.6% at the end of 2024 (previously 2.4%). The end-2025 estimate was unchanged at 2.2% and the end-2026 estimate was left at 2%.
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The unemployment rate profile was little changed despite much stronger above-potential forecast growth.
Unemployment is expected to be 4% at the end of 2024 (previously 4.1%), 4.1% at the end of 2025 (unchanged), and 4% at the end of 2026 (previously 4.1%). The NAIRU is still thought by the FOMC to be 4.1%. The marginal change to expected unemployment came despite much stronger growth, with GDP expected to increase by 2.1% over 2024 (previously 1.4%), 2% over 2025 (previously 1.8%), and 2% over 2026 (previously 1.9%). Potential growth was unchanged at 1.8%.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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