Moderating inflation will enable the Federal Reserve to reduce the federal funds rate and spur ongoing economic expansion, according to the latest forecast from the American Bankers Association’s Economic Advisory Committee.
The committee expects 2 percent economic growth in both the second half of 2024 and 2 percent growth for all of 2025. The committee places the risk of a recession in the near-term at 30 percent 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,’” Luke Tilley, committee chair and chief economist at M&T Bank/Wilmington Trust, said. “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.”
In the labor market, the committee anticipates that unemployment rate, which was at 4.2 percent, will peak at 4.4 percent in the first half of 2025. That is slightly higher than the previous forecast.
Further, the group expects inflation, as measured by personal consumption expenditures (PCE), the Fed’s preferred inflation indicator, will hit its 2 percent goal by the second quarter of 2025.
On interest rates, the committee expects the Federal Reserve to cut 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,” Tilley said.
Further. 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 percent in 2025.
Finally, the committee believes house price appreciation will moderate from 6.8 percent in the second quarter of 2024 to 3.1 percent by the fourth quarter of 2025. The decline in mortgage rates over the last few months should spur housing construction, and the committee expects quarterly housing starts to increase from 1.34 million in Q2 2024 to 1.45 million by Q4 2025.
The committee consist of 15 chief economists from some of North America’s largest banks, including:
• EAC Chair Luke Tilley, EVP and chief economist, M&T Bank/Wilmington Trust, Buffalo, N.Y.;
• Bill Adams, SVP and chief economist, Comerica Bank, Dallas;
• Scott Anderson, managing director and chief economist, BMO Capital Markets, San Francisco;
• Beth Ann Bovino, SVP and chief economist, US Bank, New York;
• Ryan James Boyle, SVP and chief U.S. economist, Northern Trust Corporation, Chicago;
• Beata Caranci, SVP and chief economist, TD Bank Group, Toronto;
• Augustine Faucher, SVP and chief economist, PNC Financial Services Group, Pittsburgh;
• Matthew Luzzetti, chief U.S. economist, Deutsche Bank, New York;
• Tendayi Kapfidze, managing director and chief corporate economist, Wells Fargo & Co., New York;
• Bruce Kasman, managing director and chief economist, JPMorgan Chase & Co., New York;
• Christopher Low, chief economist, First Horizon National Corp’s FHN Financial, New York;
• Simona Mocuta, managing director and chief economist, State Street Global Advisors, Boston;
• Richard Moody, SVP and chief economist, Regions Bank, Birmingham, Ala.;
• Olu Omodunbi, SVP and chief economist, Huntington National Bank, Columbus, Ohio; and
• Ellen Zentner, chief economic strategist and global head of thematic and macro investing for Morgan Stanley Wealth Management, Morgan Stanley, New York.