Have Interest Rates Peaked? Top Economists Say the Fed Will Start Cutting Soon

Economists and investors have largely decided that the Federal Reserve is done hiking interest rates and now Wall Street is taking bets on when it will begin to cut.

"The inflation fever has broken in the United States," said Bill Adams, chief economist for Comerica Bank in Dallas. He expects the Fed to cut rates by a quarter point in June.

That's when Morgan Stanley economists expects the first cuts. UBS Investment Bank economists, on the other hand, see them coming as early as March.

The Fed has raised its Federal Funds rate 11 times since March 2022, but it has held steady at its current rate since July. Now Wall Street has collectively decided that the its rate hikes are over, even as Fed officials warn they could hike again if inflation sticks or surges.

The probability that the Fed will hold rates steady at its Dec. 12-13 and Jan. 30-31 meetings are now at 100%, according to the CME FedWatch Tool, which is based on Fed Funds futures trading.

From there, the odds tip in the favor of a rate cut, instead, and start to rise from there.

The FedWatch Tool shows a 34% chance of a quarter-point rate cut in March — in line with UBS' forecast. And a 50% chance in May. By June, there's about a 90% of a cut or cuts totaling as much as three quarters of a point.

Inflation flattened in October, with the consumer price index coming in at 3.2%, giving hope that the Fed can take a victory lap in its fight against inflation. CPI, a measure of inflation, peaked at 9.1% in June 2022 and appears to be gliding down toward the Fed's 2% target.

Fed officials have been content to hold rates at current levels as they gather data on how well their efforts are working.

“Progress continues, though we still have a way to go,” Chicago Fed president Austan Goolsbee said after the inflation data was released Tuesday.

The economy and the labor market, while showing signs of slowing, remain strong and could keep inflation from falling further. The housing market, meanwhile, continues to see persistent inflation.

"I wouldn't consider the Fed cutting rates before May," said Fred Taylor, managing director and partner at Beacon Pointe Advisors' Denver office. "They don't want to cut rates. They're worried about the economy being too strong."

UBS is not so convinced of the economy's underlying strength, and many others also view the economy as drastically slowing in the last quarter of this year.

UBS' forecast of rate cuts beginning in March is based on an assumption that the economy will slide into a recession next year, prompting the Fed to cut rates to keep the engines rumbling.

Historically, interest-rate hiking campaigns to curb inflation have resulted in recessions.

“We don’t see the conditions for why this time is so different,” Bhanu Baweja, chief strategist at UBS Investment Bank told Bloomberg. “Inflation is normalizing quickly and by the time we get to March, the Fed will be looking at real rates which are very high.”

Goldman Sachs has put the odds of a recession at 15%. Its economists predict rate cuts will begin in the fourth quarter of 2024, according to a forecast Sunday. They expect a quarter-point cut, followed by a quarter-point cut per quarter until the second quarter of 2026.

That would eventually bring the Fed's key rate from its 22-year high of 5.25% to 5.5% down to 3.5% to 3.75%.

“Our forecast could be thought of as a compromise between Fed officials who see little reason to keep the funds rate high once the inflation problem is solved and those who see little reason to stimulate an already-strong economy,” Goldman economist David Mericle wrote.