Important expectations from the US Federal Reserve regarding interest and inflation

Atlanta Federal Reserve President Raphael Bostic said late Friday that gradual interest rate cuts are needed to bring the benchmark rate to a range of 3% to 3.5% by the end of next year, which he believes will bring inflation down to its 2% target and keep the U.S. economy out of recession.

“We have to get inflation back to our 2 percent target,” Bostic said at the Mississippi Economic Education Council’s American Enterprise Forum in Jackson, Mississippi. “I don’t want to get to a point where inflation stops because monetary policy hasn’t been tight long enough, so I’m going to be patient.”

More interest rate cuts

At the same time, Bostic expects further cuts to the Fed’s target for short-term borrowing costs, which currently range between 4.75% and 5.00%. “If economic conditions continue as they are, inflation continues to decline, labor markets remain strong, and economic growth continues, we should be able to continue on the path toward a return to neutral,” he said.

Bostic explained that the Fed’s neutral monetary policy, where it neither stimulates borrowing costs nor constrains economic growth, is probably between 3% and 3.5%. He noted that inflation, currently at 2.2% based on the Fed’s preferred measure, will likely head toward the 2% target by the end of 2025, and said that should be the timeline for reaching neutral.

Financial Markets' Interest Rate Expectations

Financial markets are currently expecting two quarter-point rate cuts before the end of the year, and further cuts next year, which could take the rate to a range of 3.25% to 3.5% by September 2025, according to the US interest rate tracker available on Investing Saudi Arabia.

The Federal Reserve cut interest rates by a larger-than-expected half-percentage point last month to prevent borrowing costs from taking a sharp toll on the labor market. Since then, labor market readings have been stronger than expected, with monthly job growth accelerating and the unemployment rate falling to 4.1%.

Bostic reiterated that he expects only one quarter-point cut in the Fed’s final two meetings this year. “A recession has never been part of my outlook,” he said. “I’ve always believed that there is enough momentum in this economy to absorb the effects of our hawkish policy and get inflation down to our 2 percent target. I’m grateful that this is happening well, but the work is far from done.”