News Mar 19, 2024 08:21 AM EDT

Rate Cuts Delayed: How it Impacts Your Financial Decisions

By April Fowell

Many Americans are looking forward to the Federal Reserve's first reduction in its benchmark interest rate of the year: potential homebuyers hope for cheaper mortgage rates. Higher stock prices are anticipated by Wall Street dealers. With record-high interest rates on credit card debt, consumers are seeking for a break.

Rate Cuts Delayed: How it Impacts Your Financial Decisions

Many Americans are looking forward to the Federal Reserve's first reduction in its benchmark interest rate of the year: potential homebuyers hope for cheaper mortgage rates. Higher stock prices are anticipated by Wall Street dealers.
(Photo : by MANDEL NGAN/AFP via Getty Images)

Not to mention that a boost to the economy from reduced borrowing rates would probably help President Joe Biden's reelection campaign.

However, during their meeting this week, Chair Jerome Powell and the other Fed members are anticipated to play it cautious, holding their interest rate steady for the fifth consecutive meeting and indicating that they still want more proof that inflation is steadily rising to their 2% objective.

Fed's Cautious Approach to Possible Rate Reduction

What makes this round of possible rate reduction unique is the Fed's cautious attitude. Former Fed economist and senior economist at Dreyfus-Mellon Vincent Reinhart points out that the Fed usually lowers interest rates rapidly when the economy deteriorates in an often fruitless attempt to avert a recession.

However, the economy is still strong this time around. Only because inflation has gradually decreased from a peak of 9.1% in June 2022 is the Fed considering lowering interest rates. Because of this, it is approaching rate cuts in the same manner that it generally approaches rate hikes: slowly and deliberately, while attempting to deduce the direction of the economy from sometimes contradictory evidence.

Following their most recent meeting in January, the officials of the central bank had stated that they required "greater confidence" that inflation was sharply declining toward their 2% objective. Since then, two reports on inflation from the government have shown that the rate of price rises is still quite high.

The American economy is still exceptionally strong in the majority of areas. Companies are continuing to expand, unemployment is still low, record highs are being reached in the stock market, and inflation has fallen from its peak. However, average prices are still far higher than they were before to the outbreak, which has angered many Americans and led Republicans to attempt to blame Biden.

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Mixed Signals in Core Prices and Fed's Inflation Outlook

When volatile food and energy prices are taken out of the picture, so-called "core" prices increased in January and February at a monthly pace of 0.4%, which is significantly faster than the Fed's target inflation rate. In February, core prices increased 3.8% over the previous year. Core prices are seen to be a reliable indicator of the anticipated direction of inflation.

However, a measure of housing costs dropped in February, which is a noteworthy development since the government measures housing as one of the "stickiest" price categories. However, prices in more erratic categories, such as apparel, used automobiles, and airline tickets, increased in February and may possibly reverse in the upcoming months.

In fact, a number of Federal Reserve officials have stated in speeches that they anticipate inflation to continue falling this year, but perhaps more slowly than in 2023.

Additionally, the Fed has factored in the possibility that price hikes may only abate gradually this year. It predicted in December that by the end of 2024, core inflation will have reached 2.4%. The Fed's favored estimate puts that close to its current 2.8%.

The Fed's members are likely to reiterate their December prediction of three rate cuts by the end of 2024 when they release an update to their quarterly economic estimates on Wednesday. Even still, the central bank's total prognosis for 2024 would only decrease to two rate cuts if two of the 19 Fed officials were to revise their forecast to one fewer rate cut. Since that inflation has continued to be high since the beginning of the year, several experts anticipate that to occur.

The Federal Reserve's benchmark rate is currently at 5.4%, the highest point in 23 years, following a run of 11 rate rises that increased borrowing costs for both consumers and companies while simultaneously attempting to tame the worst inflation in four decades.

Similar to the Fed, other major central banks are maintaining high interest rates in order to maintain tight control over sudden increases in consumer prices. Unlike in the US, pressure to cut borrowing prices is mounting in Europe as inflation declines and economic development stalls. The head of the European Central Bank intimated this month that a rate drop would not occur until June, and at its meeting on Thursday, the Bank of England is not anticipated to rule out a rate decrease anytime soon.

The majority of analysts predict that the Fed would decrease interest rates for the first time at its June meeting, which would indicate that the Fed would announce such a move in May. Three more inflation figures and three more job reports will be in the hands of the decision-makers by June.

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