As the economy shows signs of slowing, ING Economics expects the Federal Reserve to begin a series of interest rate cuts starting in the second quarter of 2024. These expected moves are based on an assessment of moderate inflation and a weak labor market, as detailed by economists at ING.
ING analysis indicates that the Fed is likely to implement six interest rate cuts starting in the second quarter of next year, and continuing through 2025. The cumulative effect of these cuts is expected to reduce the current federal funds rate from 5.33% to about 3.83% by the end of 2024, with a further decline to around 2.83% by the end of 2025.
This strategic approach reflects confidence in the economy's ability to maintain its resilience without resorting to the sharp zero percent rates typically used during periods of severe contraction. It contrasts with a more modest easing of around 125 basis points throughout next year, as currently expected by futures markets.
The rationale behind this precautionary monetary policy is to address various pressures on consumer spending, which is challenged by stagnant real household incomes and rising credit card delinquencies. These issues are exacerbated by the resumption of student loan payments and the depletion of pandemic-era savings.
ING also notes that the full economic impact of the Fed's rate adjustments could take up to a year and a half to appear. The planned interest rate cuts are seen as a mitigation strategy against immediate hard zero interest rate policies, given the usual lag in the impact of interest rate on economic stimulus.
