Multiple interest rate cuts unlikely in 2024

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Credit Sesame discusses why multiple interest rate cuts in 2024 are unlikely.

The Federal Open Market Committee (FOMC) is the subgroup of the Federal Reserve that makes interest rate decisions. Its meeting on June 11-12, 2024, concluded with no change in interest rates, but there was an important update to the FOMC’s economic projections.

Inflation decreased but not enough

The Fed began raising rates in March 2022 to combat soaring inflation. Over the course of eleven rate increases, it has raised the Federal funds rate by 5.25%.

The Fed set an inflation target of 2.0%. This is based on the Personal Consumption Expenditures (PCE) price index, a measure of inflation that tends to be a bit more moderate than the more widely known Consumer Price Index.

Year-over-year increases in the PCE price index peaked at 7.1% in June 2022 and then started to subside. However, since October 2023, they leveled off to between 2.5% and 2.9%. That’s a vast improvement over 7.1% inflation but still above the Fed’s target of 2.0%.

By the latter part of 2023, inflation had cooled enough for the Fed to stop raising rates. Almost immediately, investors began speculating on when the Fed would start cutting rates. The Fed itself forecast that it would cut rates by around 0.75% during 2024. Bullish commentators went further still, predicting even steeper rate cuts.

So far, inflation has been persistent, and the Fed has held off on any rate cuts.

The Fed’s outlook for rate cuts in 2024 is pessimistic

There have been no interest rate cuts in the first half of 2024, and persistent inflation means the Fed has dampened rate cut expectations for the remainder of the year.

The Fed releases a series of economic projections every three months. These projections show what the Fed expects to happen with economic growth, unemployment, inflation, and interest rates over the next few years.

The previous projections, released in March 2024, forecast the Fed funds rate would fall to 4.6% by the end of this year and to 3.9% by the end of 2025. However, the updated projections released at the end of the June 2024 meeting show that the Fed intends to slow its roll.

The Fed now expects the Fed funds rate to be 5.1% at the end of 2024. That would imply just a single 0.25% rate cut this year, 0.5% less than the Fed originally expected.

Inflation drives interest rates

A closer look at the Fed’s latest projections shows why it is hesitant to cut rates. Previously, the Fed had forecast that by the end of 2024, inflation would fall to 2.6%. It has now changed this forecast to 2.8%.

That might not seem like a huge difference. However, 2.8% would represent an uptick from the most recent PCE price index figures. The latest projections show that inflation is proving harder to address than the Fed originally thought. This makes the Fed more inclined to leave interest rates where they are until inflation shows some sustained downward progress.

The Fed’s economic projections are not carved in stone. It has changed its outlook before, and it can change forecasts and policy again if conditions change. A decrease in interest rates is not likely to happen until there is first a significant decrease in inflation.

Some consumers may see rate increases

Consumers looking forward to some relief from high interest rates this year may have to wait longer than expected. In fact, some consumers might see rates go up before they go down.

Delinquency rates on consumer credit have continued to rise. More consumers are behind on their debt payments, which raises the risk of lending money. When that happens, one way lenders respond is to compensate for that risk by raising interest rates—especially for consumers with weaker credit histories.

Under these conditions, consumers with low credit scores are wise to look for ways to improve their scores so that they can take advantage of lower interest rates generally offered to individuals with higher credit scores.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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