Interest rate cuts are top of mind around the country, for good reason. It's widely expected that the Federal Reserve will begin slashing rates later this year, and among the likely benefits will be cheaper mortgages, lower credit card APRs and a juiced stock market.
But what if these expectations are wrong? What if the Fed decides to raise rates once again before bringing them back down?
The implications of interest rate changes are major 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 increases to tamp down on inflation, before pausing the hikes in July 2023. Now, the Fed is trying to balance inflation and interest rates as carefully as possible to avoid recession.
Most experts expect the next Fed move to be a rate cut. But it might be wise to prepare for one more rate increase before that, according to one Fed official.
Fed officials consider another interest rate hike
In January, Dallas Federal Reserve president Lorie Logan said something that many don’t want to hear: Don’t be surprised if another interest rate hike comes in 2024. "If we don’t maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we’ve made," Logan said. "In light of the easing in financial conditions in recent months, we shouldn’t take the possibility of another rate increase off the table just yet."
The reasoning behind Logan’s statement is all in the timing. When inflation was rocketing, the Fed didn’t just boost the federal funds rate above 5% in one fell swoop. The process occurred through months of incremental increases, whose effects were measured by experts, until economic measures started to turn favorable. Likewise, rate decreases have to happen slowly; knowing when and by how much to cut rates could prove to be the difference between a soft landing and a hard one for the economy.
As it stands right now, the American economy is strong. The stock market is performing well and unemployment was just 3.7% in January. Economic growth is good. If the Fed were to decrease rates in this strong economic landscape, it could spur a rise in consumer spending and borrowing that sends inflation skyrocketing once again. It's for these reasons Logan said that the Fed might need to consider the possibility of another rate hike in the near future.
What's more, the central bank is worried that the stock market is already pricing in multiple rate cuts this year, and waiting allows for this buzz of activity to settle so it has a clearer picture to evaluate. By waiting longer to cut rates, or by raising rates once more, the Fed can study its data more closely to confirm that inflation really is approaching the target rate of 2%.
“President Logan’s comments remain understandable, given policymakers’ potential wariness that expectations for cuts this year have eased financial conditions at the same time that the economy is firing on all cylinders,” says Ben Bakkum, senior investment strategist at advising company Betterment.
Interest rate hike or cuts: What's next?
Taking all of this strategizing into account, it’s clear that we should never say never to another rate hike. However, experts see it as unlikely that a rate hike will happen soon. Americans may be waiting for that first cut longer than they might want, but the consensus still indicates that cuts are coming.
“The bar for another rate hike is extremely high, suggesting we likely shouldn’t take President Logan’s comments as gospel,” Bakkum says. “As inflation settles around where [the Fed] would prefer to see it, policymakers can shift from recently focusing entirely on ensuring 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 scope of the tighter monetary policy to reflect on the economy, the labor market may not have felt the full effect of the Fed’s actions yet. The Fed would be loath to risk another rate hike because of worries its policies could cause unemployment to ripple across the economy.
“The timing and speed of the rate cuts is something [the Fed is] maintaining flexibility over,” says Charlie Ripley, senior investment strategist at Allianz. “I think everyone agrees as inflation moves closer to the 2% target, the need for policy rates to remain at 5.50% seems pervasive and the Fed has already signaled that.” He adds that it’s still likely interest rates will stay at current levels for as long as the Fed continues to observe the string of strong indicators like low unemployment.
Overall, it seems that another interest rate hike is unlikely. But it’s also clear that Americans shouldn’t hold their breath waiting for dramatically lower interest rates. With unemployment low, and economic growth high, the Fed can (and will) take its time and make extra sure it’s safe before cutting rates.
Fed Chairman Jerome Powell made that clear in a recent interview. "We're very focused on doing the right thing for the economy in the medium and the longer term," Powell said, adding that "it's not likely" the Fed will be confident enough come its March meeting ready to cut rates.
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