The Fed’s Predicted Rate Cuts: An English Perspective

Introduction

Economic forecaster, Rajeev Dhawan from Georgia State University, has recently shared his outlook. According to him, the Federal Reserve is about to embark on a series of aggressive rate cuts. These cuts, amounting to 175 basis points by spring 2025, are aimed at steering the economy back to its trend level by late 2025.

A Series of Rate Cuts

Dhawan predicts a series of rate cuts beginning this September. The first will be a 25-basis-point cut, followed by a 50-basis-point reduction in November, post-election. Another 50-basis-point cut is expected in December. Two more rate reductions, totalling 50 basis points, will take place in early 2025. These measures are designed to prevent the current economic soft landing from turning into a hard one.

The Economic Context

In recent months, inflation has moderated. This reduction provides the Federal Reserve with the flexibility to employ these rate cuts. The aim is to counteract anticipated further weaknesses in the labour market and revive the economy.

Notably, Dhawan holds the view that these interventions are crucial for the economy to stabilize and return to its trend by late 2025. He stated, "This is the shot in the arm the economy needs."

Impact on Household Spending

Interestingly, Dhawan also highlighted a shift in consumer behaviour. Last year, post-Covid, there was a strong desire for travel, which has now started to wane. The initial post-pandemic travel surge extended into spring 2024, but increasing interest rates and cumulative inflation effects have led to more subdued spending on non-durable goods.

Health Services Gain Momentum

However, spending on services such as healthcare has picked up. Pent-up demand for elective medical appointments and procedures, postponed during Covid, is currently being addressed. Healthcare spending has seen substantial growth in the last 12 months.

Employment Landscape

Dhawan also touched upon employment trends. While job growth on paper has appeared robust over the past nine months, there has been a notable disparity in the quality of these jobs. The majority of new roles are in lower-wage sectors like hospitality and retail, with far fewer in high-paying industries such as IT and finance.

Dhawan emphasized the importance of high-paying jobs for sustaining middle-class growth, noting, "One IT job pay equals six hospitality worker jobs." This impact is evident in Treasury receipts, where income tax collections have declined despite positive job growth due to the lower wages of most new jobs.

Effect on the Housing Market

Lastly, Dhawan addressed the potential impact of these rate cuts on the housing market. He anticipates that while the housing market will benefit from lower interest rates, a significant drop in mortgage rates is unlikely. The stubbornly high mortgage premium and large fiscal deficits are expected to keep long-bond yields from falling drastically.

Regional Housing Trends

Notably, housing price trends exhibit regional variances. West of the Mississippi, markets like San Francisco and Seattle have experienced significant price compression since mid-2022. Conversely, the Southeast continues to see price increases, driven by affordable living and better job prospects.

National Economic Forecast Highlights

Dhawan’s forecast includes detailed predictions for GDP growth, job growth, mortgage rates, housing starts, and inflation rates over the next few years. Highlights from his national economic forecast are as follows:

• U.S. real GDP growth: 2.5% in 2024, 1.2% in 2025, and 1.8% in 2026.
• National job growth: Monthly gains of 58,000 in the next six months, rebounding to 102,000 by late 2025, and further to 137,000 in 2026.
• 30-year mortgage rate: Averaging 6.6% in 2024, moderating to 5.8% in 2025, and rising to 6.4% in 2026.
• Housing starts: 1.345 million in 2024, 1.312 million in 2025, and 1.350 million in 2026.
• CPI inflation: From 4.1% in 2023 to 2.9% in 2024, 1.7% in 2025, and 2.0% in 2026.
• Vehicle sales: 15.5 million in 2023, dropping to 15.3 million in 2024, 15.0 million in 2025, and recovering to 15.6 million in 2026.

Conclusion

In summary, the Federal Reserve’s anticipated rate cuts are expected to play a pivotal role in stabilizing the US economy. While there are challenges ahead, these measures are projected to mitigate economic weaknesses and support growth. Dhawan’s insights provide a nuanced perspective on the potential impacts across various sectors, highlighting both opportunities and cautionary points.

For further details, you may consult Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.

For media inquiries, please contact Holly Frew at the J. Mack Robinson College of Business via email at hfrew@gsu.edu or by phone at 404-413-7076.