Core Conclusions (Current Market Consensus)

The market generally predicts that the Federal Reserve will start cutting interest rates in 2024, but the specific timing, magnitude, and frequency are highly uncertain and subject to change as economic data fluctuate frequently.

Key Forecast Dimensions and Current Views

1. When will rate cuts begin?

· Early forecast (end of 2023): Widely expected to start in March 2024.
· Current mainstream forecast (2024): Due to persistent inflation and a strong labor market, the first rate cut has been significantly delayed.
· Latest focus: The market's primary concern is the September or December FOMC meetings. September is seen as the most likely start, conditional on continued improvement in inflation data.

2. How many rate cuts will there be in 2024? How large will they be?

· Federal Reserve official guidance (dot plot): In June's projections, the median forecast among Fed officials was for 1 rate cut (0.25%) in 2024, a sharp reduction from the 3 cuts projected in March.
· Market futures pricing: The market currently bets on 1-2 rate cuts (each 0.25%), implying that the year-end interest rate could be in the 4.75%-5.00% range.

3. What are the prerequisites for rate cuts? (The Fed’s focus points)

The Fed has explicitly stated that rate cuts require more confidence, mainly focusing on two aspects:

· Sustained and credible return of inflation to the 2% target: especially the core PCE price index. Recent inflation data (CPI, PCE) has cooled but remains volatile, which is a primary reason for postponing rate cuts.
· Noticeable cooling of the labor market: Currently, the unemployment rate remains at a historic low (around 4%), and job growth remains solid. The Fed hopes to see a "loosening" rather than a "collapse" in the labor market.

Core Variables Affecting the Forecast

Any unexpected changes in the following data could immediately alter market expectations:

1. Inflation data: Monthly releases of CPI (Consumer Price Index) and PCE (Personal Consumption Expenditures Price Index).
2. Employment data: Non-farm payroll reports, unemployment rate, wage growth.
3. Economic growth data: GDP, retail sales, etc. The U.S. economy remains resilient, with recession risks lowered, giving the Fed room to "wait and see."
4. Financial conditions: Stock market rallies, narrowing credit spreads, etc., could lead to looser financial conditions and reduce the urgency for the Fed to cut rates.
5. Global risks: Geopolitical conflicts, policies of other major central banks.

Risks and Uncertainties in Market Forecasts

· “Higher for longer” risk: The biggest risk is that inflation stalls or rebounds, leading the Fed to refrain from rate cuts throughout the year and keep rates at the high level of 5.25%-5.50% for longer.
· Recession risk: If the economy unexpectedly slows rapidly due to high interest rates, the Fed may be forced to cut rates sooner and more aggressively to respond to a recession.
· Political factors: 2024 is an election year in the U.S.; while the Fed aims to maintain policy independence, market sentiment and public opinion pressures may increase volatility.

Implications for Investors and Ordinary People

· For the stock market: Rate cut expectations are a key support. Expectations#美联储降息预测