So how quickly will the Federal Reserve cut interest rates and when? Current thinking suggests it will cut rates gradually, in quarter-percent increments, and will begin cutting soon.

By the end of the year, the rate decline could be three-quarters of a percentage point (75 basis points) or perhaps even a full point, according to futures market bets. Either way, few doubt that the Fed’s rate cut will begin in September, the first downward move in interest rates since the central bank began tightening in March 2022.

Importantly, futures traders, as shown in the CME Fed Watch tool, are unanimously expecting the moves to come in quarter-percentage-point increments during the three Fed committee meetings remaining this year. That’s a change from forecasts a week ago for a half-percentage-point cut in September.

Research firm Action Economics predicts that the Fed’s target will fall to 4.5% to 4.75% by year-end, down 0.75 percentage points. It will then fall another full percentage point by the end of 2025. The Fed “will take advantage of market expectations for cuts of up to 100 basis points by year-end to also ease by 25 basis points in November and December, helping to avoid a hard landing in 2025,” wrote Sam Stovall, chief investment strategist at CFRA Research.

The Fed’s dot chart, which shows policymakers’ consensus expectations for interest rates and the economy, will attract even more attention than usual when it is released after the Sept. 18 meeting.

The latest interest rate forecast was supported by the calm inflation news: The consumer price index for July recorded its lowest reading since 2021 and was just below economists’ expectations of 3%.

Some saw the rise in retail sales, which rose 1% last month from June, as a worrying sign of an improving economy that could create some inflationary pressure. But that assessment was met with skepticism. As Piedmont Crescent Capital pointed out in a commentary, the rise was fueled by a one-off event – a rebound in auto sales, which had previously been slowed by a cyberattack on car dealerships in June.

The basis for everything: There is a broad consensus that interest rates are too high now that inflation is under control and that the economy needs less debt repayment.

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Tags: CFRA, CME Fed Watch Tool, cyber attack, Federal Reserve, inflation, interest rates, Piedmont Crescent Capital, retail sales, Sam Stovall