Barclays Economists Project Interest Rate Cuts Starting in March
Barclays’ economists have made significant adjustments to their expectations for the Federal Open Market Committee’s (FOMC) interest rate cuts, now projecting the first cut to occur in March. This decision is based on the influence of recent soft Producer Price Index (PPI) data on the Personal Consumption Expenditures (PCE) estimate, leading to an expectation of policy rate cuts starting in March. The economists, led by Marc Giannoni, anticipate a 25-basis-point cut at every other meeting, reflecting a cautious approach to monetary policy.
The revised projection for the FOMC’s interest rate cut to March is underpinned by the expectation of core PCE inflation to be at 1.9% in the second half of 2023 and to end 2024 at 2.4% year-on-year. These figures have a direct influence on the anticipation of rate cuts starting in March. Giannoni highlighted that the FOMC is likely to be more comfortable cutting rates without needing to see a substantial weakening of the economy or the labor market, indicating a proactive stance in response to inflation dynamics.
The recalibration of the nominal policy rate in light of lower inflation is a crucial factor driving the rate cut projection. It is noteworthy that this projection is not contingent on substantial weakening of the economy or the labor market, signifying a nuanced approach by the FOMC. Furthermore, the FOMC’s preference to use the PCE index to measure inflation is contrasted by other indicators such as the median CPI from the Cleveland Fed, sticky price inflation from the Atlanta Fed, and the Dallas Fed trimmed mean PCE, which show relatively elevated levels. This highlights the complexity involved in assessing inflation dynamics and the importance of considering multiple indicators in the decision-making process.
Barclays’ economists have projected the federal fund rate target range to decline to 4.25%-4.50% by the end of 2024 and to 3.25%-3.50% by the end of 2024. This forward guidance provides valuable insights for market participants and policymakers, shaping expectations and influencing investment and monetary policy decisions. The anticipated decline in the federal fund rate target range underscores the cautious approach taken by the FOMC in navigating the evolving economic landscape, balancing inflation dynamics and the broader macroeconomic environment. This guidance also has implications for businesses and consumers, impacting borrowing costs, investment decisions, and overall economic activity.
In conclusion, Barclays’ economists have revised their projection for the FOMC’s interest rate cut to March, reflecting a proactive stance in response to inflation dynamics. The influence of core PCE inflation estimates, the recalibration of the nominal policy rate, and the preference for the PCE index as a measure of inflation collectively shape the outlook for policy rate cuts. The projected decline in the federal fund rate target range underscores the cautious approach taken by the FOMC in navigating the evolving economic landscape. As market participants and policymakers digest this guidance, it will play a pivotal role in shaping expectations and influencing investment and monetary policy decisions.
The information provided is for general informational purposes only and should not be considered as investment advice.