Analysts at JPMorgan predict that the Federal Reserve (Fed) could take steps toward keeping the economy on a steady soft landing. Rates could drop below 3% to eliminate the difficult situation. What is the scenario behind these predictions?

Experts at JPMorgan $JPM+1.7% predict that the Federal Reserve could take a major step in 2024, cutting interest rates to below 3%, in order to maintain a soft landing. Bob Michele, global head of fixed income at JPMorgan, said the move could be a key element in maintaining economic stability amid falling inflation.

With expectations that inflation will continue to fall, Michele sees cutting interest rates by as much as 250 basis points by the end of 2024 as a measure the Fed could take. This reduction could lead to a rate below the 3% threshold.

Michele says maintaining a soft landing is a challenge for the economy, although he acknowledges the Federal Reserve's successes to date. "I tip my hat to the Fed. They engineered a soft landing. The only way to sustain it will be to gradually lower the federal funds rate; otherwise, real rates will be too strong a headwind," Michele said.

While the interest rate remains in the 5.25%-5.5% range, the proposed 250 basis point cut could pull the rate down to below 3%. Michele argues that this would be consistent with the Fed's assumed neutral rate of 2.5%, which would provide an adequate adjustment to the economy .

However, Michele cautions that the Fed should carefully consider its approach to avoid a premature policy reversal, which could accelerate inflation. "Looking at these risks, higher inflation is more problematic for markets," he warned. "Businesses and households simply absorb the high rate environment and suddenly you see home sales start to pick up again, car sales pick up and businesses invest and that creates a higher level of inflation."

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