Momentum grows for interest rate cuts in 2024. Experts explain why.
Interest rate cuts would ease stress for households saddled by expensive loans.
The Federal Reserve released its long-awaited forecast late last year: Interest rate cuts were on the way, set to ease stress for households saddled by expensive loans. A rough patch for inflation at the outset of 2024, however, forced the central bank to all but abandon those plans.
Now, investors expect as many as three interest rate cuts by the end of the year. The burst of optimism about loan relief follows a monthslong stretch of cooling inflation and rising unemployment. Those trends have elicited a shift in priority: preventing job losses versus reining in runaway inflation, economists told ABC News.
At seven consecutive meetings spanning nearly a year, the Fed has opted to hold rates steady at the highest level in 23 years.
As intended, the prolonged stretch of high interest rates appears to have slowed the economy and slashed price increases, economists said. But, they added, the policy risks triggering layoffs and tipping the economy into a recession.
“Inflation is under control and unemployment has started ticking up,” Derek Horstmeyer, a finance professor at George Mason University's School of Business, told ABC News. “Those are the go-to signs to cut rates.”
“If they let unemployment keep going up, they risk a recession,” Horstmeyer added.
Interest rate cuts are widely expected by investors. The chances of an interest rate cut at the Fed’s meeting in September stand at more than 90%, according to the CME FedWatch Tool, a measure of market sentiment. The odds stand above 50% for two additional rate cuts in November and December, the CME FedWatch Tool shows.
Price increases have slowed significantly from a peak of more than 9%, though inflation remains more than a percentage point higher than the Fed's target rate of 2%. An outright drop in prices in June compared to the month prior marked a major sign of progress in slowing inflation.
Meanwhile, the economy has cooled. Economic output has slowed markedly at the outset of 2024, though it has continued to grow at a solid pace. The unemployment rate has ticked up this year from 3.7% to 4.1%.
“If they’re thinking about lowering interest rates, the salient thing will be the strength of the economy and the strength of employment,” Anastassia Fedyk, a professor of finance at Haas Business School at the University of California Berkeley, told ABC News. “That means they’re ready to start cutting.”
The Fed is guided by a dual mandate to keep inflation under control and maximize employment. The monthslong stretch of good news for inflation alongside bad news for unemployment has prompted the Fed to give additional consideration to its goal of keeping Americans on the job, Fed Chair Jerome Powell said on Monday.
“For a long time, since inflation arrived, it’s been right to mainly focus on inflation. But now that inflation has come down and the labor market has indeed cooled off, we’re going to be looking at both mandates. They’re in much better balance,” Powell said at a meeting of The Economic Club of Washington, D.C.
“That means that if we were to see an unexpected weakening in the labor market, then that might also be a reason for reaction by us,” Powell added.
Economists who spoke to ABC News offered forecasts of between one and three interest rate cuts by the end of 2024, depending on the course of inflation, unemployment and other relevant data. They also cast doubt on concerns that the Fed would weigh political considerations ahead of the November election.
“The situation seems reasonably well set up for cutting rates later this year,” Bill English, a finance professor at Yale University, told ABC News. “Exactly how fast or how far isn’t so clear.”
“I was at the Fed for years and never heard decisions being made for political reasons,” English added, noting that a cut may upset Republicans while the absence of action could anger Democrats. “There’s no winning on this. I think you do what you think is the right thing.”
Still, the economists noted, the recent string of positive news for inflation could reverse itself, leaving the central bank with no choice but to hold rates steady.
“If we see inflation numbers rising, especially if we see it a few months in a row, it’s not off the table that rates will stay,” Fedyk said.