US Fed's upcoming easing cycle to be tamer, slower

September 11, 2024 (MLN): The US Federal Reserve monetary policy-easing cycle that is about to begin will be mild and slow compared with previous Fed rate-cutting episodes, Fitch Ratings says in its latest Global Economic Outlook report.

Services inflation in the US is still too high to be consistent with inflation returning to target on a sustained basis.

Fitch expects world growth in 2024 to be in line with its historical trend at 2.7%, 0.1pp higher than the June 2024 Global Economic Outlook (GEO) forecast.

Fitch has revised up the US growth forecast for 2024 to 2.5% from 2.1% in June, and forecasts for the UK, Brazil and Russia have also been revised upwards.

Furthermore, it expects global GDP to slow to 2.5% in 2025 as US growth falls to 1.6% on a fading fiscal impulse and a gradual slowdown in consumption, as household income decelerates.

A Fed easing cycle is finally about to begin, but rates will remain restrictive next year and the impact of rate cuts on growth will be small.

“The long-awaited Fed easing cycle is upon us, but the FOMC will be cautious after the inflation challenges of the past few years. The pace of rate cuts will be gentle and monetary easing won’t do much to boost growth next year,” said Brian Coulton, Chief Economist.

Fitch also expects China’s growth to slow next year to 4.5% from 4.8% this year as rapid export growth eases.

However, eurozone growth should recover to 1.5% in 2025 from 0.8% (unrevised) this year, mainly reflecting the impact of a recovery in real wages on consumption, which has been weak since 2022.

Unemployment is gradually rising in the US and a number of other advanced economies.

This mainly reflects a pick-up in labour supply rather than falling labour demand and we do not believe it signals the onset of recession. But labour market conditions are cooling.

This is easing pressures on wage inflation, at the margin, giving central banks more confidence to cut interest rates.

Recent data have boosted the Fed’s confidence that disinflation is on track and they have effectively preannounced a rate cut in September.

The entity expects 25bp cuts at the September and December meetings and further cuts of 125bp in 2025 and 75bp in 2026.

These interest rate forecasts – unchanged from June – represent a much less aggressive easing cycle than most prior Fed easing episodes.

There is still work to be done in reducing services inflation and the challenges of the past few years will engender caution at the FOMC.

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