As we approach the latter half of 2024, all eyes are on the Federal Reserve and its impending decisions on interest rates. Economists and investors are closely monitoring the central bank’s approach, especially given the current economic landscape. With the Federal Reserve maintaining interest rates in the mid-5 percent range amidst declining inflation, the real interest rate—that is, the rate adjusted for inflation—has effectively been on the rise.
This increase in the real interest rate has led to an unintended tightening of monetary policy. In an effort to avoid this de facto tightening, many analysts believe that a rate cut in September is highly probable. The consensus among experts suggests that the Federal Reserve is likely to initiate rate cuts sooner rather than later to normalize monetary policy.
Anticipating Multiple Rate Cuts in 2024
Should the anticipated rate cuts commence in September, there is potential for up to three reductions by the end of the year, coinciding with each of the last three Federal Open Market Committee (FOMC) meetings. This strategic move would aim to bring the real interest rate back to levels observed earlier this year or even mid-last year, aligning monetary policy with current economic conditions.
At the beginning of 2024, traders and economists had forecasted up to six rate cuts from the Federal Reserve. While it’s evident that such a number won’t materialize within this year, expectations have simply shifted into the future. Many of these projected cuts are now anticipated to occur in 2025. Presently, it appears plausible that at least two, possibly three, rate cuts will be implemented in 2024, followed by an additional three or four in the subsequent year.
This gradual normalization of monetary policy is expected to be carried out in a controlled manner, distinguishing it from previous periods characterized by abrupt policy shifts in response to economic crises or recessions. The Federal Reserve’s measured approach aims to adjust interest rates without disrupting the steady growth of the economy.
Reference(s):
U.S. economy & markets outlook: September rate cuts and tech earnings
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