Interest rate cuts are a top priority across the country, for good reason. The Federal Reserve is widely expected to begin cutting rates later this year, and the likely benefits will include cheaper mortgages, lower credit card APRs and a booming stock market.
But what if these expectations are wrong? What if the Fed decides to do so? increase rates one more time before lowering them again?
The implications of changes in interest rates are important for the American economy. The Fed is performing a delicate balancing act. In March 2022, the central bank began what would become a 17-month series of interest rate hikes to contain inflation, before pausing the increases in July 2023. Now, the Fed is trying to balance the inflation and interest rates as carefully as possible. to avoid recession.
Most experts predict that the Fed’s next move will be a rate cut. But it may be wise to prepare for a further rate hike sooner, according to a Fed official.
Fed officials consider another interest rate hike
In January, Dallas Federal Reserve President Lorie Logan said something many don’t want to hear: Don’t be surprised if another interest rate hike it will arrive in 2024. “If we don’t maintain sufficiently restrictive financial conditions, there is a risk that inflation will pick up and reverse the progress we’ve made,” Logan said. “In light of the easing of financial conditions in recent months, we should not take the possibility of another rate hike off the table just yet.”
The reasoning behind Logan’s statement is all in timing. When inflation was skyrocketing, the Fed didn’t just raise the federal funds rate above 5% in one fell swoop. The process occurred through months of incremental increases, the effects of which were measured by experts, until economic measures began to become favorable. Likewise, rate cuts need to happen slowly; Knowing when and how much to cut rates could prove to be the difference between a soft and hard landing for the economy.
As it stands, the American economy is strong. The stock market is doing well and unemployment in January was only 3.7%. Economic growth is good. If the Fed were to cut rates in this strong economic environment, it could spur a surge in consumer spending and borrowing that would send inflation skyrocketing once again. It is for these reasons that Logan said the Fed may need to consider the possibility of another rate hike in the near future.
Additionally, the central bank is concerned that the stock market is already pricing in several rate cuts this year, and waiting allows this buzz of activity to settle so it has a clearer picture to evaluate. By waiting longer to cut rates, or by raising them once again, the Fed can study its data more closely to confirm that inflation is indeed approaching its 2% target rate.
“Chairman Logan’s comments remain understandable, given policymakers’ potential wariness that expectations of cuts this year have eased financial conditions while the economy is accelerating across the board,” says Ben Bakkum, senior investment strategist at the consultancy Betterment.
Interest rate increase or cut: what will be the next step?
Taking all this strategy into account, it is clear that we should never say never to another rate hike. However, experts believe that a rate hike is unlikely to happen soon. Americans may be waiting longer than they would like for the first cut, but the consensus still indicates that cuts are coming.
“The bar for another rate hike is extremely high, suggesting we probably shouldn’t take President Logan’s comments as gospel,” Bakkum says. “While inflation stabilizes around where [the Fed] would prefer to see it, policymakers can shift from recently focusing entirely on ensuring that rates are restrictive enough to foster price stability to prioritizing the other side of their mandate, full employment.”
He explains that because it takes a long time for the full extent of the tighter monetary policy to be reflected in the economy, the labor market may not yet have felt the full effect of the Fed’s actions. The Fed would be reluctant to risk another hike rates due to fears that his policies could cause unemployment to spread throughout the economy.
“The timing and speed of rate cuts matter [the Fed is] maintain flexibility,” says Charlie Ripley, senior investment strategist at Allianz. “I think everyone agrees as inflation approaches the 2% target, the need for policy rates to remain at 5.50% seems pervasive and the Fed has already signaled this.” He adds that it is still likely that interest rates will remain at current levels as long as the Fed continues to observe the string of strong indicators such as low unemployment.
Overall, another interest rate hike seems unlikely. But it’s also clear that Americans shouldn’t hold their breath waiting for dramatically lower interest rates. With low unemployment and high economic growth, the Fed can (and will) take its time and make sure it is safe before cutting rates.
Fed Chair Jerome Powell made this clear in a recent interview. “We are very focused on doing the right thing for the economy over the medium to long term,” Powell said, adding that it is “not likely” that the Fed will be confident enough to cut rates at its March meeting.
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