What Forecasters Say About Interest Rates (and Why They Disagree)

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How soon is soon? Or exactly how much later is later?

As the year started, there was a widespread view among economists and on Wall Street that the Federal Reserve would lower interest rates in the first half of the year. Maybe in March, maybe in May, but sooner rather than later.

That long-awaited moment, two years after the Fed began ratcheting up rates to their highest level in decades, held the prospect of brightening consumer sentiment, increasing company valuations and improving corporate financing opportunities. It was called “the pivot party,” and everyone was invited.

But three months of hotter-than-expected inflation data followed. Financial markets then projected that the Fed would lower rates once, near the end of the year, or not at all — based on a view that the central bank will see little merit in such a move as long as inflation remains a bit elevated and employment is growing.

Interest rates for home and car loans tilted up again. And it seems the pivot party has been canceled. But some experts argue that it has only been postponed, leaving forecasters divided about what the rest of the year will bring.

Camp 1: Inflation Is Coming Under Control

Some market analysts and bank economists are making the case that rate cuts are still on the table. The April jobs report, which implied a cooling labor market and softer wage growth, gave them some fodder.

These analysts generally contend that current measures of inflation are overstated because of lagging indicators, reflecting cost pressures from over a year ago, that will ebb in summer. And they believe that while the diffuse process of stabilizing prices, formally called disinflation, may face setbacks (especially any oil shock), it is on track.