As the economy shows signs of cooling, ING Economics has projected that the Federal Reserve will initiate a series of interest rate cuts beginning in the second quarter of 2024. These anticipated moves are based on the assessment of moderating inflation and a softening job market, as detailed by ING's economists.
ING's analysis suggests that the Federal Reserve is likely to implement six rate reductions starting from Q2 next year, continuing into 2025. The cumulative effect of these cuts is expected to lower the current Federal Funds rate of 5.33% to around 3.83% by the end of 2024, with a further decrease to approximately 2.83% by the end of 2025.
This strategic approach reflects confidence in the economy's ability to remain resilient without resorting to the drastic zero percent rates typically used during severe downturns. It contrasts with the more modest easing of around a total of 125 basis points throughout next year, as currently expected by futures markets.
The rationale behind this preemptive monetary policy is to counteract various pressures on consumer spending, which is being challenged by stagnant real household incomes and rising credit card delinquencies. These issues are compounded by the resumption of student loan payments and the depletion of pandemic-era savings.
ING also points out that the full economic impact of the Federal Reserve's rate adjustments may take up to one-and-a-half years to manifest. The planned rate cuts are seen as a mitigation strategy against immediate drastic zero-rate policies, taking into account the typical lag in rate impact on economic stimulus.