According to economists surveyed by Bloomberg, the Fed is likely to indicate next week that it plans to cut interest rates in September, and they believe that this move will open up a loose cycle of interest rate cuts every quarter until 2025. The survey of 47 economists was conducted on July 22-24 after Biden exited the presidential election.

Nearly three-quarters of respondents said that the Fed will use the July 30-31 meeting to pave the way for a 25 basis point rate cut in September's next meeting. However, there is disagreement on how policymakers will do it.

Half of the respondents believe that Fed officials will signal action in the policy statement and 30 minutes after Fed Chairman Powell's news conference. All respondents expect the Fed to keep rates unchanged at their meeting next week, which is at a high level in over 20 years.

Nearly two-thirds of Fed watchers expect that the Federal Open Market Committee (FOMC) will state in the post-meeting statement that officials have gained some confidence that inflation is developing toward their target, which is a step toward rate cuts.

However, more than a quarter of economists believe that officials will not signal rate cuts at the July meeting, but may give more specific signals in the coming weeks, including Powell's annual speech in Jackson Hole, Wyoming at the end of August.

In recent weeks, Fed officials led by Powell have said that the labor market has tended to balance and the inflation rate has fallen back to the target of 2%, indicating that they believe the reasons for rate cuts are becoming more sufficient. Now, when deciding on policy, they need to pay attention to the Fed's dual mandate of maximum employment and stable prices.

Fed Governor Warrell said last week: 'I do believe that we are increasingly closer to the time when we should cut rates.' And Chicago Fed President Charles Gulspie warned that as inflation rates fall, monetary policy is becoming more restrictive, and the 'economy is not overheated.'

Economists expect the Fed to cut interest rates by 25 basis points in September and December, and the median of this expectation is less optimistic than the market, which believes that the probability of a 75 basis point rate cut this year is higher than 50%.

Some investors even bet that the first rate cut by the Fed could be as high as 50 basis points, but economists believe that the likelihood of this is only 20%. They said that only if labor market conditions (currently seen as strong but not overheating) are seen as deteriorating, the Fed may take this action.

Although the unemployment rate remains at a low level, this indicator has risen monthly in the past three months. The unemployment rate has risen from the lowest point of 3.4% in early 2023 to the current 4.1%, which has caused some concerns about the risk of recession. The July employment report will be released next week.

Anna Wong, chief economist of Bloomberg, said that the cooling of the labor market has been going on for some time and the decline is not sudden. Given its dual mandate, the Fed is likely to lag behind the curve in terms of rate cuts. Therefore, her team expects the unemployment rate to reach 4.5% by the end of 2024.

As for the prospect of rate cuts in September, a complicating factor is that the US presidential election in November will be nearing. If the rate cut is launched less than two months before the election, it is likely to face criticism of political motivation.

One-third of economists said that the presidential election will raise the threshold for rate cuts, which means that the data needs to become more convincing gradually, but the rest of the economists said they agree with Powell's view that the timing of the election will not affect the interest rate policy.

Although the presidential election and the struggle for control of Congress have brought uncertainty to the results of US fiscal policy in 2025, economists say that Biden's decision to withdraw from the election has not changed their expectations for the economic outlook.

The vast majority of people say that they have not changed their predictions for interest rates or economic growth due to Biden's decisions. However, one third of Fed observers still believe that the political uncertainty brought about by this year's elections has increased the downside risks to economic growth. Changes in tax policies and spending will affect the economy in 2025 and may impact interest rates.

One of the survey respondents, Thomas Fullerton, an economics professor at the University of Texas at El Paso, said: "If the federal deficit worsens by 2025, monetary policy will have to tighten and economic growth will slow down."

Editor/Emily