Interest rate cuts on the horizon: How far do market watchers think they’ll go?

Inflation isn’t dropping as low as Jerome Powell and the governors of the Federal Reserve thought it would when they began ratcheting up the funds rate in March 2022. No matter: A growing number of financial pros predict the Fed will begin lowering rates in March.

That’s music to many businesses’ ears, especially smaller ones forced to put capital improvements on hold. So just how low can we expect rates to go?

• Global financial services firm ING predicts the Fed will make up to six adjustments in 2023 totaling 150 basis points (bp), and follow it up with another 100 bp reduction in 2025. ING’s chief international economist James Knightley thinks modest economic growth, cooling inflation and a slowdown in the labor market are music to the Fed’s ears. “[These signs] should confirm no need for any further Fed policy tightening,” Knightley predicts. “We expect rate cuts from the Fed from the second quarter onwards.”
• UBS analysts are even more bullish than ING. The bank’s seers think the Fed will lower the rate substantially in the 1st quarter of 2024 – by as much as 275 bp. A near 3% rate cut right out of the chute may be in order as the jobless rate climbs and layoffs roll on. No doubt, even the biggest banks are desperate for a big nudge in order to loosen lending restrictions.
• Conor Sen, founder of Peachtree Creek Investments, also thinks the Fed will start cutting rates soon to “preserve the expansion” of the economy. Sen expects the first rate cut to come in March.
• Hedge fund billionaire Bill Ackman agrees rate cuts in Q1 are a no-brainer. Reason: Dipping inflation is making the “real rate” feel higher. A recession is going to hit harder if the Fed doesn’t lower rates significantly, and sooner than later, Ackman warns.
• And Jim Cramer says – just kidding.

What do the betting markets say?

Futures markets are starting to lean toward a rate cut earlier than March, according to the Kobeissi Letter. The markets now say there’s a better than 15% chance of a cut in January, though March is still the top choice.

“The base case shows a greater than 56% chance of rate cuts beginning in March,” says the Letter. “Markets are currently expecting a total of five [concurrent] 25 bp rate cuts in 2024.”

For what it’s worth, Fed members haven’t officially discussed rate cuts yet. All we can do is speculate what they’re thinking and maybe saying to each other in private.