Is the market too optimistic?

Economists warn: The Federal Reserve has paused interest rate cuts, and there may be only one cut this year!

According to the views of well-known economists who attended the American Economic Association conference in San Francisco last weekend, the Federal Reserve may maintain a wait-and-see attitude this year, with at most one interest rate cut.

Morgan Stanley Chief U.S. Economist Ellen Zentner stated that Federal Reserve Chairman Powell and his colleagues sent a signal of a "strong pause" at last month's meeting. The Fed's policy statement at that time indicated it would review economic conditions when "considering the degree and timing of further adjustments."

Limited prospects for interest rate cuts this year?

Harvard University professor and former senior economist in the Obama administration Jason Furman believes that if the labor market remains healthy, the Federal Reserve may only cut rates once this year. He pointed out that the Fed has shifted to a new phase where it needs "reasons" to cut rates, which is different from last year's perspective of "everything is normal, so why not cut rates."

Furman stated that if conditions remain unchanged, considering the inflation outlook and whether interest rates are in the optimal range that neither stimulates nor suppresses demand, there may be at most one 25 basis point cut. However, if the unemployment rate continues to rise, the Federal Reserve will adopt an accommodative policy.

Karen Dynan, a senior researcher at the Peterson Institute for International Economics and a professor at Harvard University, expects three interest rate cuts this year. She believes the Federal Reserve hopes to prevent economic deterioration through moderate rate cuts.

Economists expect the economy to continue growing this year but also acknowledge significant risks, mainly arising from the policy plans of the new Trump administration. Dynan estimates that the probability of the economy staying on track this year is about 75%. She noted that the wealth effect from last year's stock market rise and the increase in consumer and business confidence will support the economy.

Furman expects the economic growth rate to slow slightly this year, trending toward a growth rate of 1.5%-2%, lower than the expected growth rate of over 3% in the fourth quarter. He stated, "There are many factors pushing the economy slightly in an unfavorable direction."

Furman warned that if by mid-year the personal consumption expenditures price index inflation rate favored by the Federal Reserve returns to over 3%, the Fed may consider changing its policy direction. In November last year, the overall inflation rate was 2.4%.

It is noteworthy that Furman does not rule out the possibility of interest rate hikes in 2025.