The probability of a recession within the next year, as viewed by American economists, has fallen below 40%. However, despite growing expectations for a soft landing, fewer than two out of ten respondents believed that the Federal Reserve (Fed) would implement its first rate cut in March as the market anticipates. Three out of ten economists predicted that the first rate cut could occur in May.
According to a survey published on the 14th (local time) by the Wall Street Journal (WSJ), the average response from 71 economists regarding the 'probability of a recession occurring within the next year' was 39%. This figure is 9 percentage points lower than the 48% recorded in the previous survey in October last year. It is also significantly lower compared to 61% from January last year.
Bill Adams, Chief Economist at Comerica Bank, stated, "Compared to early last year, the likelihood of a recession this year appears smaller," adding, "Interest rates are trending downward, oil prices are falling, and incomes are rising faster than inflation." The WSJ reported that "economists still expect weak growth and rising unemployment," but also noted that "the probability of a recession has decreased. It is unlikely to be a recession." The U.S. economic growth rate for this year is expected to be in the 1% range.
In financial markets, expectations for a so-called soft landing?where inflation slows without a recession?have increased. This sentiment was clearly reflected in the WSJ survey. Economists participating in the survey predicted that the U.S. core Personal Consumption Expenditures (PCE) price index, excluding volatile energy and food prices, would slow from 3.2% in November last year to 2.3% by the end of this year. This level is close to the Fed's inflation target of 2% and nearly matches the Fed officials' inflation forecast of 2.4%.
Earlier, the Fed suggested through its December dot plot that there could be three rate cuts this year. However, opinions remain divided on the timing of the first rate cut. While rate futures markets favor a cut as early as March, only 18.4% of respondents in this survey believed the first cut would occur in March. The percentages expecting cuts in May and June were higher, at 31.4% and 34.3%, respectively. It is expected that the Fed will take a more cautious approach than market expectations to avoid repeating the mistakes of former Chairman Paul Volcker in the 1980s, who had to raise rates again after cutting them.
Additionally, economists responded that the magnitude of the Fed's rate cuts would likely fall short of market expectations. While the market currently anticipates about three rate cuts in the first half of the year, economists' responses indicated only one to two cuts. Loretta Mester, President of the Federal Reserve Bank of Cleveland and a known hawk within the Fed, emphasized in an interview with Bloomberg TV last week that "March might be too soon to expect a rate cut," adding that "more evidence of inflation easing is needed," supporting a cautious stance. Thomas Barkin, President of the Richmond Fed, also expressed concern that service inflation remains sticky, unlike goods inflation.
Last week's release of the December Consumer Price Index (CPI) showed a rebound exceeding expectations, weakening early rate cut hopes. However, the Producer Price Index (PPI) released the following day slowed more than expected, giving renewed momentum to the March rate cut theory. According to the Chicago Mercantile Exchange (CME) FedWatch tool, rate futures currently reflect nearly an 80% chance that the Fed will hold rates steady in January and then cut rates by at least 0.25 percentage points at the March Federal Open Market Committee (FOMC) meeting.
Following inflation indicators, this week will see the release of retail sales data (on the 17th), the Fed's Beige Book economic report (on the 17th), and the University of Michigan Consumer Sentiment Index (on the 19th), which will help gauge the U.S. economic trend. Speeches are also scheduled from key Fed figures including John Williams, President of the New York Fed; Christopher Waller, Fed Governor; and Raphael Bostic, President of the Atlanta Fed. The financial markets will be closed on Monday the 15th in observance of Martin Luther King Jr. Day.
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