Financial Services Association, January 31: The Federal Reserve's “2024” debut is about to open early tomorrow morning Beijing time. At that time, the bank will announce interest rate decisions, and Federal Reserve Chairman Powell will also hold a press conference. Prior to that, the latest media survey of some Federal Reserve observers revealed the latest expectations of current market experts from another perspective.

According to reports, interviewees generally believe that the extent of the Fed's interest rate cut this year will be lower than the market's positive expectations, and the timing of the first rate cut is also expected to be later than expected by the market.

Specifically, only 9% think the Federal Reserve will cut interest rates in March, and 50% think they will cut interest rates in May. It is expected that the largest number of people will cut interest rates in June, up to 70%. The average number of interviewees is expected to cut interest rates 3 times this year, while the futures market expects to cut interest rates 5 times this year.

Joel Naroff, president of consulting firm Naroff Economics, wrote in response to the survey: “There is little reason to expect a sharp economic slowdown, so the Federal Reserve may not risk a rise in inflation due to premature easing of policies.”

This group of Fed observers is more in line with the outlook announced by the central bank, rather than in line with mainstream market expectations. However, by 2025, market forecasts, survey results and the Federal Reserve's forecast tend to be in line, and it is believed that the fund interest rate will be between 3.3% and 3.6%. The debate now is how fast the Federal Reserve can achieve this goal.

Peter Boockvar, an analyst at Bleakley Financial Group, predicts, “Given the market's expectations for interest rate cuts, Federal Reserve Chairman Powell will calm down, but he will still tend to cut interest rates. (It's) a tough balance because the market only listens to what they want to hear.”

Economic prospects

Although respondents expect the Federal Reserve to act cautiously, in general, they think the Fed should take more aggressive action: 56% of respondents think there is a greater risk that the Fed will cut interest rates too late.

Furthermore, 25 respondents, including economists, strategists, and fund managers, were less in agreement about the risk of the Federal Reserve reducing its balance sheet by $7.6 trillion.

They expect the downsizing (so-called quantitative austerity) to end in November this year. The Federal Reserve is expected to cut total reserves by another 1 trillion US dollars to 6.6 trillion US dollars, and reduce bank reserves from the current about 3.5 trillion US dollars to 3 trillion US dollars.

This level of bank reserves is almost double what it was before the Federal Reserve began expanding its balance sheet in 2020 to provide more stimulus to the economy. The Federal Reserve said it wanted to keep QT at a level slightly above what it called “sufficient reserves.”

According to the survey, 36% of respondents said that the greater risk is that the Fed's balance sheet is too large. 16% of respondents hold the opposite view. Instead, they think that the Fed's balance sheet is too small is a risk. However, 32% of people think these two risks are small, and 12% think they are equal.

Furthermore, the survey also showed that respondents still think the economy will slow down in the future, but it won't be as serious as they mispredicted a year ago. The average forecast for this year's gross domestic product (GDP) is that GDP will slow to 1.3%, the unemployment rate will rise 0.6 percentage points to 4.3%, and the overall consumer price index (CPI) will reach 2.7% by the end of the year.

Robert Fry, chief economist at Robert Fry Economics LLC, said, “Since November 2022, the yield curve has been inverted, leading economic indicators have declined for 21 consecutive months, and the M2 money supply has declined year on year. I cannot let myself give up on predicting the recession. But it is becoming increasingly clear that, for various reasons, the US economy is far less sensitive to interest rates than it used to be.”

But Moody's Analytics' Mark Zandy wrote, “It's hard not to be more optimistic about the economic outlook. Despite downside threats, including the potential outbreak of various geopolitical hotspots and contentious presidential elections, they are becoming less threatening.”

Editor/Corrine