Federal Reserve’s Aggressive Interest Rate Cuts Forecast

Rajeev Dhawan’s Expectations

According to Rajeev Dhawan, Director of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business, the Federal Reserve is poised for a series of "practically aggressive" interest rate cuts. These cuts, beginning in September 2024, will total 175 basis points by early spring 2025.

Dhawan shared his insights during Georgia State’s semiannual economic forecasting webinar, revealing a calculated forecast for the Federal Reserve’s actions. "The rate of inflation has moderated recently, giving the Fed room for aggressive rate cuts to counter expected labor market weaknesses," he stated.

Breakdown of the Rate Cuts

The initial rate cut of 25 basis points is anticipated at the Federal Open Market Committee meeting on September 17-18. Following the elections, a more substantial cut of 50 basis points is expected in November, echoed by another 50 basis points in December. The Fed will eventually introduce two additional cuts totaling 50 basis points in early 2025. This proactive approach aims to prevent the current soft landing from turning severe.

Impact on Various Sectors

Household Consumption and Travel

Last year’s post-Covid travel surge is losing momentum. Dhawan pointed out, "The urge to see the world peaked last year but is now waning as interest rates rise and inflation bites."

Consumers have curtailed expenditure on non-durables like furniture and clothing. Nonetheless, service-side spending, particularly healthcare, has seen an upswing. "Elective medical procedures, long postponed due to Covid, are now being scheduled," noted Dhawan. This reflects a growing healthcare expenditure, which stands at around $3 trillion.

Airline Industry

Delta Air Lines also illustrated the trend of changing consumer behavior. Dhawan observed, "Delta saw an eight percent revenue increase last quarter, driven not just by ticket sales, but also through cargo and loyalty programs."

While airline ticket sales growth has slowed, the cargo segment and loyalty programs have bolstered revenue. Spirit Airlines’ recent pilot furloughs and cautious expansion plans by other airlines further indicate a decelerating travel boom.

Employment Dynamics

Evaluating the employment landscape, job growth has been robust in numbers but weak in purchasing power, primarily driven by lower-wage sectors like hospitality and retail. "Over 90 percent of new jobs are in lower-wage sectors, limiting growth in the income tax base," remarked Dhawan.

Higher-paying job growth remains essential for middle-class economic health. In 2022, income tax receipts surged by 16.5 percent but later plunged by 15.5 percent in 2023, reflecting the predominance of low-wage jobs. Social-security tax collections, albeit growing, have also moderated recently.

Housing Market Outlook

Dhawan fields frequent queries about the impact of rate cuts on the housing market. He remarks, "A 175-basis-point rate cut won’t translate directly into lower mortgage rates due to high mortgage premiums and fiscal deficits." However, some benefits will be felt, even if mortgage rates won’t drop to five percent any time soon.

Regional Differences

Housing markets west of the Mississippi are experiencing price compressions, typified by double-digit drops in places like San Francisco and Seattle. Conversely, the Southeast enjoys rising home prices driven by better job prospects and affordability.

Macroeconomic Projections

National Economic Forecast Highlights

• U.S. Real GDP Growth: Expected to be 2.5% in 2024, 1.2% in 2025, and 1.8% in 2026.
• Job Growth: Monthly gains projected at 58,000 for the next six months, rebounding to 102,000 by late 2025 and 137,000 by 2026.
• Mortgage Rates: The 30-year rate to average 6.6% in 2024, drop to 5.8% in 2025, and rise to 6.4% in 2026.
• Housing Starts: Projected at 1.345 million in 2024, 1.312 million in 2025, and 1.350 million in 2026.
• CPI Inflation: Expected to decrease from 4.1% in 2023 to 2.9% in 2024, then to 1.7% in 2025, stabilizing at 2.0% in 2026.
• Vehicle Sales: Anticipated to be 15.5 million in 2023, 15.3 million in 2024, then dropping to 15.0 million in 2025, and rebounding to 15.6 million in 2026.

Contact Information

For further details:

Holly Frew
J. Mack Robinson College of Business
404-413-7076
hfrew@gsu.edu