The American Bankers Association’s Economic Advisory Committee expects moderating inflation to enable the Federal Reserve to reduce the federal funds rate and support an ongoing economic expansion, according to the latest forecast the group released today.
The committee, composed of 15 chief economists from some of North America’s largest banks, expects solid real economic growth at around 2% for both the second half of 2024 and for 2025. The bank economists’ current consensus is that near-term recession risk stands at 30% in 2025, unchanged from the group’s last forecast in March.
“When it comes to hitting its dual mandate targets on employment and inflation, the Fed is close to ‘mission accomplished,’” said Luke Tilley, committee chair and chief economist at M&T Bank/Wilmington Trust. “At the same time, despite expectations for continued growth, the labor market has softened from historically tight levels. That is something that will need to be monitored going forward.”
The unemployment rate has risen from 3.4% at the beginning of 2023 to 4.2% in August of this year. Going forward, the committee expects the unemployment rate to peak at 4.4% in the first half of 2025, a bit higher than the previous forecast.
The group expects inflation to continue to glide down to the Federal Reserve’s long-run goal of 2%. The committee’s forecast is that personal consumption expenditures, the Fed’s preferred inflation indicator, will meet the Fed’s long-term goal of 2% by the second quarter of 2025.
Following the 50 basis point cut in September, the consensus view of the committee is that the Federal Reserve will continue to reduce interest rates, cutting the target federal funds rate range by an additional 150 basis points between now and the end of 2025.
“It’s the longer-term path that matters more, and our expectation is for the Fed’s policy rate – which is still restrictive – to reach a more neutral level by the end of next year,” said Tilley.
With lower rates, the committee members expect credit availability to expand and credit quality to remain stable over the next six months. The forecast anticipates bank consumer delinquency rates to remain relatively stable, at 2.7% in 2025.
