US Fed to Cut Rate by 50 Basis Points, Moody’s Predicts
Moody’s Investors Service predicts the US Federal Reserve is most likely to cut rates by 50 basis points in September 2024.
The prediction came ahead of the US Federal Reserve Open Committee meeting on 17 to 18 September 2024, after the European Central Bank (ECB) made two rate cuts.
Last week, the ECB cut its deposit rate by 25 basis points (bp) to 3.5% and its main refinancing rate by 60 bp to 3.65%, resuming an easing cycle that began in June.
Providing no guidance, the ECB stressed a meeting-to-meeting, data-dependent approach to future rate decisions.
Moody’s said that after cutting the policy rate by 50 bp in June, it expects the ECB to hold rates in October and cut again in December by 25 bp.
The investment services company said easing inflation momentum amid soft economic growth should allow further easing by 125 bp cumulatively in 2025.
“We expect the US Federal Reserve (Fed) to ease monetary policy by 50 bp at its 17-18 September meeting, joining other major central banks”.
It noted that US labour market data and underlying inflation measures have long met the Federal Open Market Committee’s (FOMC) criteria to begin rate cuts.
Indeed, the rapidly cooling labor market suggests the Fed is falling behind the maximum-employment side of its dual mandate, Moody’s said.
“Under our soft landing baseline scenario, we expect the Fed to lower the federal funds rate by 75 bp this year and another 125 bp in 2025”.
After the Bank of England’s (BoE) 25 bp rate cut to 5% in August, analysts said they do not expect policy easing when the BoE meets on 19 September.
Moody’s said the close vote breakdown at the August meeting in favour of a rate cut and elevated services inflation suggest policy easing is likely to resume only in November, when the central bank reviews its quarterly projections.
“Our forecasts for ECB policy rates assume that inflation will decline over the course of 2025. The ECB expects headline inflation to average 2.2% in 2025 and 1.9% in 2026, down from 2.5% in 2024.
“For now, however, stubborn underlying inflationary pressures will keep the central bank vigilant”.
It said Euro area headline inflation eased to 2.2% in August, within touching distance of the ECB’s 2% medium-term target, but disinflation has so far been driven by lower food, energy and goods prices.
Indeed, services inflation remains sticky, hovering around 4% since last November. Moody’s stated that sustained moderation in wage growth should limit cost-driven pressure and slow services inflation through 2025.
Euro area wage growth, while elevated, is slowing. Annual growth in negotiated wages (3.6% in Q2) and compensation per employee (4.3%) remains well above pre-pandemic norms but has eased considerably from cyclical peaks.
Going forward, Moody’s said easing monetary conditions will support a recovery in euro area growth, which analysts estimate will rise to 1.5% in 2025, up from a 0.9% forecast for 2024.
“Our forecasts envision the pace of expansion will strengthen in several member countries as the region continues to shed the economic malaise brought on by the energy shock and restrictive financial conditions”, Moody’s said. #US Fed to Cut Rate by 50 Basis Points, Moody’s Predicts
