MARK-TO-MARKET: Federal Reserve signals lower interest rates in 2024
As part of its mandate, the U.S. Federal Reserve manages our nation’s monetary policy. By manipulating the cost and availability of credit, the Fed seeks to influence spending, employment, investment and inflation to promote the health of our economy.
One of the Fed’s main tools in this endeavor is to adjust the benchmark fed funds rate, which serves as a basis for many types of consumer and business debt. As the fed funds rate is either raised or lowered, so typically do interest rates on credit cards, bank loans, auto loans, HELOCs and even home mortgages.
For much of the past two years, the Fed has been rapidly raising the fed funds rate to help temper inflation. The Fed hopes that by raising interest rates, it will help reduce spending by making it more expensive for consumers and businesses to buy goods and services on credit. As spending falls, inflationary pressures should likely ease. Between March 2022 and July 2023, the Fed raised the fed funds rate from near-0% to a level between 5.25%-5.5%, where it currently stands. This was the most aggressive pace of interest rate hikes by the Fed in nearly 44 years.
But at its recent December meeting, the Fed surprised Wall Street when it announced it would ramp up the pace at which it begins to lower interest rates in 2024. Prior to the December meeting, the Fed was projecting just a single quarter-point (0.25%) reduction to the fed funds rate next year. The Fed is now expected to implement three quarter-point rate cuts in 2024. This would lower the fed funds rate from 5.25%-5.5% to a level between 4.5%-4.75%.
As justification for lowering interest rates at a faster pace, the Fed is concerned about a weakening economy and declining job gains. In his post-December meeting press conference, Fed Chair Jerome Powell said that “Recent indicators suggest that growth of economic activity has slowed substantially from the outsized pace seen in the third quarter.”
Moreover, that economic weakness is expected to carry throughout the remainder of 2024.
The big question that remains is, will the economy dip back into recession next year? Based on Powell’s comments at his press conference, the Fed believes it can orchestrate what’s called a “soft landing.” This is where the Fed’s monetary policies can effectively reduce inflation without triggering a recession.
But many Wall Street economists and analysts express their doubts on a soft landing. They contend the Fed’s fight against inflation will ultimately trigger a “hard landing," where the economy goes into recession. They believe the impact from the Fed’s rapid rise in interest rates over the past two years, along with other policy measures to fight inflation, will simply prove too severe to avoid a recession.
Unfortunately, the general consensus is that the U.S. economy will significantly weaken in the upcoming months. Whether that weakness is substantial enough to send the economy into a recession is where the debate truly lies. Some argue a soft landing is the likely scenario. Others contend it will be a hard landing that brings a recession. Stuck in the middle of that debate are consumers and businesses who must anxiously wait to see what happens.