Many investors hoped by now the Federal Reserve would consider interest rate cuts, which could kick off a new bull market. But, various factors now indicate the Fed will continue to raise rates, likely delaying the market any significant upward movement.
Why The Fed Won’t Start Cutting Interest Rates Now: The Fed’s goal in raising interest rates was to bring inflation down. While inflation came down and cooled significantly, the core CPI was still at 5.7% year-over-year, well above the Fed’s 2% inflation target.
Some investors believed that by now the Fed would be forced to lower interest rates, regardless of inflation numbers. This belief was built around the idea rising interest rates would cause a major increase in unemployment and a potential recession.
But throughout the past few months, the labor market and overall economy remained strong. Unemployment rates did not skyrocket or really moved higher at all. GDP numbers came in better than expected.
So, for the Fed, as long as the economy remained strong, it had no reason to stop raising interest rates. In an ironic twist of fate, it was as if the market was being punished because the underlying economy is too strong.
The Fed will likely announce a 25 basis point hike this afternoon, according to CME’s Fed Watch Tool. But, the real meat will come when Fed Chair Jerome Powell takes the podium at 2:30 pm ET. It’s reasonable to assume Powell will acknowledge the fact that inflation has cooled, but that it still is not in the Fed’s target range.
So When Will The Fed Start Cutting Rates? The Fed could start cutting rates when one of two things happens (or a mixture of both). This first: inflation continues to cool and gets closer to the 2% target rate. It's not exactly clear if the Fed will keep raising rates until landing exactly on a 2% YoY CPI, or willing to cut once it gets to 2.8% or a number that’s closer to 2%.
The other environment in which the Fed might start cutting rates is if the unemployment number starts to increase, or other cracks in the economy start to form. In this case, the Fed would be forced to cut interest rates to salvage the economy.
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