Fed's 1St Interest Rate Cut Expected In September: Experts

The US Federal Reserve's first interest rate cut this year is expected to take place in September, followed by additional cuts in December and the first quarter of 2025, experts say.

Philip Marey, a senior US strategist at Rabobank, noted that the March inflation data in the US was a "game changer, destroying the Fed's hope of starting the cutting cycle in June."

"We now expect the first rate cut in September and the second in December," he said.

Marey said the only decision expected from the bank is to slow the pace of its balance sheet reduction.

He highlighted that the Fed could halve the pace in May.

Marey said they assume a Trump victory in November's presidential election, which could result in a rise in inflation due to a possible global import tariff, and the central bank could pause the rate cut cycle after two more rate cuts in 2025.

Chris Rupkey, the chief economist at FWD Bonds, highlighted that monthly changes in core prices in inflation may somewhat slow down in the second and third quarters of 2024.

"Under this scenario, our bet is September is when we will see the first rate cut. It will be a test of just how political the Federal Reserve is because we cannot recall the central bank taking action before this close to a presidential election," he said.

James Knightley, chief international economist at ING, said that high inflation and strong economic activity and employment figures postponed market expectations for the Fed's interest rate cut to December.

"We still see an opportunity for a September rate cut," he said.

Knightley estimated that the Fed may be cautious and signal if inflation remains high, which would also mean that interest rates will remain high.

⁠Rate cuts may start in 2025

Felix Schmidt, a senior economist at Berenberg Bank, said the US economy remains surprisingly resilient despite the Fed's cumulative rate hikes of more than 500 basis points in 2022 and 2023.

Schmidt highlighted that a loose fiscal policy, including a large increase in public investment, neutralizes monetary constraints.

He added that demand was not supported by extensive subsidies for private investment and government spending after artificial consumption-led growth caused by an overly generous policy.

"The continued dynamic economic situation, the tight labor market and the stalled disinflation process will prompt the Fed to leave the key interest rate at the current level until the end of 2024," he said.

Schmidt estimates that when the fiscal stimulus ends in 2025, most likely, the Fed could move slowly to loosening monetary policy.

He noted that four rate cuts of 25 basis points each could take place by the fall of 2025.

*Writing by Emir Yildirim -