Battle of interest rate cut forecasts

Fed watchers are forecasting fewer interest rate cuts than futures markets and are anticipating a slower economic slowdown

A recent survey of economists, strategists and fund managers, collectively known as Fed watcher, has revealed a more conservative outlook for the Federal Reserve's upcoming interest rate decisions compared to futures markets. According to the survey, only 9% of respondents expect the Fed to cut interest rates in March, a stark contrast to the 37% probability of such an action estimated by futures markets.

Expectations for interest rate cuts

While the majority (70%) believe there will be a cut in June, futures markets are leaning towards an earlier date, seeing an 84% chance of a cut in May. This discrepancy extends to the total number of rate cuts expected this year: survey respondents are predicting just over three, while futures markets are pricing in five to six rate cuts.

Economic downturn unlikely

Survey respondents generally agreed that there is unlikely to be a major economic slowdown, suggesting the Fed may not need to ease monetary policy as quickly as some expect. Over half of respondents, 56%, said the greater risk was cutting interest rates too late rather than too early.

Balance sheet reduction

There are also expectations that the Fed's $7.6 trillion balance sheet will shrink. Forecasts point to a November end date and a $1 trillion decline in total reserves to $6.6 trillion. However, opinions differ as to whether the balance sheet remains too large or becomes too small.

Long-term forecasts for 2025

Looking further into the future, the forecasts of the market, the survey and the Fed itself indicate an expected key interest rate of between 3.3% and 3.6% for 2025. The pace at which the Fed will reach this rate remains controversial. The CNBC poll suggests that forecasters are predicting a slowdown in the economy, although not as drastic as previously thought. The average GDP forecast suggests a slowdown to 1.3%, with unemployment expected to rise to 4.3% from current levels.