The Federal Reserve Expected to Cut Interest Rates Next Year, Say Chief Economists

The Federal Reserve is done raising interest rates and will likely cut them by roughly one percentage point next year, according to chief economists at some of North America’s largest banks.

Economic Growth Set to Slow

While the US will probably dodge a recession, economic growth looks set to slow markedly in the coming quarters, pushing up unemployment while reducing inflation, the latest forecast from the American Bankers Association’s Economic Advisory Committee shows.

Tightening Cycle Has Run Its Course

“Given both demonstrated and anticipated progress on inflation, the majority of the committee members believe the Fed’s tightening cycle has run its course,” said Simona Mocuta, chair of the 14-member panel and chief economist at State Street Global Advisors.

Rate Decision Next Week

The US central bank is widely expected to hold rates steady at its meeting next week, though investors are divided over whether it will follow that up with a rate increase later in the year.

Forecasts Presented to Fed Chair

The ABA advisory committee includes economists from JPMorgan Chase & Co., Morgan Stanley, and Wells Fargo & Co. Its forecasts are regularly presented to Fed Chair Jerome Powell and fellow members of the central bank’s board in Washington.

Growth and Inflation Projections

The committee sees economic growth slowing to less than an annualized 1% rate in the coming three quarters in response to the Fed’s past interest-rate increases and a tightening of credit conditions, according to their median forecast. Unemployment is projected to rise to 4.4% by the end of next year, from 3.8% in August, while consumer price inflation is forecast to ease to 2.2% from 3.2% in July.

Odds of a Soft Landing

“As a consensus for the committee, the odds of a soft landing have improved quite dramatically in the near term,” Mocuta told reporters via Zoom. “But at the same time, a lot of concerns remain about how sustainable is this extraordinary resilience that the economy has so far demonstrated.”

Risk of Recession

The committee sees the odds of a recession next year at just under 50%.