WASHINGTON: Economists are increasingly saying the Federal Reserve’s cycle of interest-rate increases is over—and that its next move will be a cut.
In a Wall Street Journal survey of economists this month, economists split roughly evenly over the direction of the Federal Reserve’s next interest-rate move, with 51% saying the next move would be a cut and 49% predicting a rate increase. That is up from 44% who said in the April survey that the Fed’s next move would be to lower rates and 19% in the March survey.
Fed officials have also started openly discussing the conditions under which they would lower interest rates. That has led investors to estimate a roughly 58% probability of a Fed rate cut by the end of 2019, according to CME Group data.
Economists in the survey don’t expect a move—up or down—to come soon. On average, they expect the Fed to keep interest rates at their current range of between 2.25% and 2.5% through the end of 2021.
“No further hikes,” said Gus Faucher, chief economist at PNC Financial Services Group. “Cut will come when [the] next recession starts.”
In recent weeks, Fed officials have consistently said they see no need to move rates soon. Late last year, officials pegged two rate increases for 2019, but they have since backed away from that estimate. In projections released in March, Fed officials saw no rate move this year.
On May 3, Fed Vice Chairman Richard Clarida said officials could afford to be patient with interest rates “as we assess what, if any, further adjustments in our policy stance might be required.”
Some officials, such as Chicago Fed President Charles Evans, point to sluggish inflation growth as a possible justification for a rate cut.
“If activity softens more than expected or if inflation and inflation expectations continue to run too low, then policy may have to be left on hold—or perhaps even loosened—to provide the appropriate accommodation to obtain our objectives,” he said last week.
After hitting the Fed’s 2% target in 2018, inflation has sagged recently and last month was 1.5%, according to the central bank’s preferred price index. Fed Chairman Jerome Powell has said he believes the last few months of low inflation are only temporary and that the measure—the price index for personal-consumption expenditures—will move up once more.
The possibility of continued weak price growth has led economists to consider the effect on monetary policy.
“While we expect the Fed to maintain rates steady for the foreseeable future, persistently low inflation, eroding inflation expectations, or a negative economic and financial-market shock would rapidly bring about discussions of a rate cut,” said Gregory Daco, chief U.S. economist at Oxford Economics.
The Wall Street Journal surveyed 60 economists May 3-7, but not every economist answered every question. - WSJ
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