The Fed

Economic growth underlined by fourth-quarter GDP reinforces Fed’s cautious approach to rate cuts

Rate cut by midyear now looks more likely, economists say

The Fed, led by Chair Jerome Powell, will cut rates “slowly and cautiously,” one economist said.

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The rapid economic growth rate seen in the last three months of 2023 reinforces the Federal Reserve’s cautious approach to easing monetary policy, some economists say.

There will not be “willy-nilly rate cuts,” said Chris Low, chief economist at FHN Financial, in a note to clients Thursday. “The Fed will cut rates this year slowly and cautiously.”

Financial markets think that the Fed will definitely cut rates by May. They’re more divided about a March cut, seeing just under a 50% chance. Investors see six rate cuts this year, while the median Fed forecast is for three. Atlanta Fed President Raphael Bostic said he thinks there will be only two rate cuts.

Economists who think there will fewer rate cuts than the market expects said the GDP data fit with their expectations.

The U.S. grew at a robust 3.3% annual pace in the fourth quarter, well above the 2% expected. This is the sixth straight quarter with above-average growth, which the Fed defines as a 1.8% growth rate.

With growth so far above the long-run average, “this underscores our expectation for the Fed to hold off on cutting rates until the third quarter,” said Katherine Judge, senior economist at CIBC Capital Markets.

Read: Biden may not get a political lift from strong GDP report

Beth Ann Bovino, chief economist at U.S. Bank, said she expects the Fed to be more mindful about when it starts the easing process. She said a March rate cut seems less likely in the wake of the GDP data.

Bovino said she expects four rate cuts this year.

Ken Kim, senior economist at KPMG Economics, agreed that “a rate cut by the Federal Reserve is more likely by the end of the year.”

Also see: More economists on prospect of Fed rate cuts

On the other hand, despite the strong growth during the October-December period, Kathy Bostjancic, chief economist at Nationwide, thinks the economy will falter this year and experience a mild recession by the middle of 2024.