When Will The Federal Reserve Lower Interest Rates?

Investors nationwide have been anticipating the Federal Reserve’s first cut to the federal funds rate since March 2020, before the COVID-19 pandemic. Since March 2022, the Fed has consistently raised rates to combat inflation, adversely affecting the capital markets by hindering economic growth. However, since July 2023, the Federal Reserve has halted interest rate increases, opting to hold them steady at 5.25-5.50% as inflation slows. This raises the question for investors: when will the Federal Reserve cut interest rates to stimulate economic growth and allow capital markets to thrive?

When considering interest rate predictions, the first factor to examine is the real gross domestic product (real GDP). Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy within a given year. In the third quarter of 2023, GDP grew rapidly at an annual rate of 4.9%. However, by the first quarter of 2024, this growth had slowed significantly to an annual rate of just 1.3%. This slowdown indicates that the economy has decelerated to near the desired 2% rate, suggesting that interest rate reductions may be forthcoming shortly.

Another factor to consider is the consumer price index (CPI), which measures the cost to the average consumer of acquiring a basket of goods and services. In March 2024, the CPI’s year-on-year rate spiked to 3.5% due to high inflation in gasoline and shelter. Although this is a decrease from the 9.1% growth seen in June 2022, it still exceeds the Fed's 2% target rate.  Further reductions in the CPI are necessary for the Fed to lower interest rates.

Lastly, when unemployment becomes too high, the Federal Reserve lowers interest rates to stimulate job growth. Despite the economy adding 272,000 jobs, surpassing the Dow Jones consensus estimate of 190,000, the unemployment rate has recently risen to 4%, the highest since January 2022. The Fed is expected to lower interest rates in order to address this elevated unemployment.

The next four meetings of the Federal Reserve's Federal Open Market Committee (FOMC) are scheduled for June, July, September and November. The timing of any interest rate changes could significantly impact the presidential race. If the Fed determines the economy is robust enough to lower interest rates, it would benefit Joe Biden by demonstrating his ability to foster a strong economy. Conversely, if the Fed opts to maintain current interest rates, keeping them sky high, voters might gravitate towards Donald Trump, seeking a stronger economic plan.

The world eagerly awaits June 12, when Federal Reserve Chair Jerome Powell will indicate whether or not the economy is moving toward an interest rate decrease. So far, Powell has suggested that interest rates will remain steady for a while. "We think policy is well positioned to handle the risks that we face," Powell stated. "Given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work."

Despite expectations of imminent rate cuts, JPMorgan Chase CEO Jamie Dimon says his firm is preparing for all possibilities, including potential rate hikes. "We are prepared for a very broad range of interest rates, from 2% to 8% or even more, with equally wide-ranging economic outcomes—from strong economic growth with moderate inflation to a recession with inflation; i.e., stagflation," Dimon remarked.

While investors nationwide are preparing for potential changes in interest rates, the general consensus is that the Fed will lower interest rates during their September FOMC meeting, with additional reductions anticipated thereafter.

___

Photo Caption: Federal Reserve Chair Jerome Powell presents the Monetary Policy Report

Photo Credit: Federal Reserve / Flickr