Investors were betting big on Federal Reserve rate cuts in early 2024, betting that central bankers would lower interest rates to around 4 percent by the end of the year. But after months of persistent inflation and strong economic growth, the outlook is starting to look a lot less dramatic.
Market prices now suggest that rates will end the year at around 4.75 percent. That would mean Federal Reserve officials had cut rates two or three times from their current 5.3 percent.
Policymakers are trying to strike a delicate balance as they contemplate how to respond to the economic moment. Central bankers don't want to risk tanking the labor market and triggering a recession by keeping interest rates too high for too long. But they also want to avoid cutting borrowing costs too soon or too much, which could prompt the economy to accelerate again and inflation to take hold even more firmly. Officials have so far stuck to their forecast for rate cuts by 2024, although they have made clear they are in no rush to reduce rates.
This is what policymakers are considering when thinking about what to do about interest rates, how incoming data could reshape the path forward, and what that will mean for markets and the economy.
What does “higher for longer” mean.
When people say they expect rates to be “higher for longer,” they often mean one or two things. Sometimes the phrase refers to the short term: The Federal Reserve could take longer to start cutting borrowing costs and proceed with those reductions more slowly this year. Other times, it means that interest rates will remain noticeably higher in the coming years than they were normal in the decade before the 2020 pandemic.
When it comes to 2024, top Federal Reserve officials have been very clear that they are primarily focused on what is happening with inflation as they debate when to lower interest rates. If policymakers believe price increases will return to their 2 percent target, they might feel comfortable cutting back even in a strong economy.
When it comes to the long term, Federal Reserve officials are likely to be most influenced by factors such as workforce growth and productivity. If the economy has more momentum than before, perhaps because government investment in infrastructure and new technologies like artificial intelligence are driving growth at a faster rate, it could be the case that rates will need to stay a little higher to keep the economy going. running at a higher rate. even keel.
In a sustained economy, the very low interest rates that prevailed during the 2010s could prove too low. To use the economic term, “neutral” rate setting that neither heats nor cools the economy could be higher than before Covid.
For 2024, the concern is persistent inflation.
Some Federal Reserve officials have recently argued that interest rates could remain higher this year than the central bank's forecasts suggest.
Officials projected in March that they were still likely to reduce borrowing costs threefold in 2024. But Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, suggested during a virtual event last week that he could imagine a scenario in which The Federal Reserve will not lower interest rates at all this year. And Raphael Bostic, president of the Atlanta Federal Reserve, said he did not foresee a rate cut until November or December.
The caution comes after inflation, which declined steadily throughout 2023, has moved sideways in recent months. And with new stresses emerging, including a spike in gasoline prices, mild pressure on supply chains after a bridge collapse in Baltimore, and pressures on housing prices that are taking longer than expected to disappear from official data, there is a risk that stagnation will continue.
Still, many economists think it's too early to worry about stagnating inflation. While price increases were faster in January and February than many economists had expected, that could have been due in part to seasonal quirks, and came after significant progress.
The Consumer Price Index inflation measure, due to be released on Wednesday, is expected to cool to 3.7 percent in March after volatile food and fuel costs are removed. This is down from an annual reading of 3.8 percent in February and well below the peak of 6.6 percent in 2022.
“Our view is that inflation is not stagnating,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “Some areas are difficult, but I think they are isolated.”
The recent inflation data does not “materially change the overall picture,” Federal Reserve Chairman Jerome H. Powell said during a speech last week, even as he signaled that the Fed would be patient before cutting rates.
The focus is also on the long term.
Some economists (and, increasingly, investors) think interest rates could stay higher in the coming years than Federal Reserve officials have predicted. Central bankers forecast in March that rates will drop to 3.1 percent by the end of 2026 and 2.6 percent in the long term.
William Dudley, former president of the Federal Reserve Bank of New York, is among those who think rates could remain higher. He noted that the economy had been expanding rapidly despite high rates, suggesting it can handle higher borrowing costs.
“If monetary policy is as tight as Chairman Powell maintains, why is the economy still growing at a rapid pace?” said Mr. Dudley.
And Jamie Dimon, CEO of JPMorgan Chase, wrote in a letter to shareholders this week that big societal changes — including the green transition, supply chain restructuring, rising health care costs and rising of military spending in response to geopolitical tensions) could “lead to stiffer inflation and higher rates than markets expect.”
He said the bank was prepared for “a very wide range of interest rates, from 2 to 8 percent or even higher.”
Going into debt would be more expensive.
If the Federal Reserve keeps interest rates higher this year and in the years to come, it will mean that cheap mortgage rates like those that prevailed in the 2010s will not return. Likewise, credit card rates and other borrowing costs will most likely continue to be higher.
As long as inflation isn't stagnant, that could be a good sign: Super-low rates were an emergency tool the Federal Reserve was using to try to revive an ailing economy. If they don't come back because growth has more momentum, that would be a testament to a more robust economy.
But for would-be homeowners or business owners who have been waiting for the cost of borrowing to come down, that could provide limited comfort.
“If we talked about higher interest rates for longer than consumers expected, I think consumers would be disappointed,” said Ernie Tedeschi, a researcher at Yale Law School who recently left the US Council of Economic Advisers. White House.
