The Federal Open Market Committee is set to announce its next interest-rate decision on Wednesday, and following a hot jobs report, there's a strong chance rates will once again remain steady. According to the CME FedWatch Tool, which estimates the likelihood the Federal Reserve will change interest rates based on market predictions, there's a 99.4% chance rates will stay where they are as of Monday.
While the FOMC forecast three interest rate cuts this year in its December projections, the Fed chair, Jerome Powell, has reiterated throughout the year that nothing is set in stone, and the nation's central bank is willing to hold out as long as necessary until it feels confident the economy has cooled down enough.
"The first quarter in the United States was notable for its lack of further progress on inflation," Powell said during a panel in Amsterdam in May.
"We did not expect this to be a smooth road, but these were higher than I think anybody expected," Powell added. "What that has told us is that we'll need to be patient and let restrictive policy do its work."
The consumer price index increased 3.3% for the 12 months ending May, according to a new report out Wednesday, which means it's still elevated. And the US labor market saw some strength in May — the US economy added 272,000 jobs that month, which was way above economists' expectations.
"We have a very interesting labor market," Julia Pollak, the chief economist for ZipRecruiter, told Business Insider. "It's not the old normal. It's the new normal where employers are slower to fire, slower to hire, and workers are slower to switch jobs. That could be both a good thing and a bad thing.
"It may be bad, partly, because it is driven in part by uncertainty and fear and high interest rates holding back activity," Pollak added. "But, it's good in other ways because some of it has to do with the fact that jobs got better during the pandemic."
The unemployment rate also ticked up to 4.0% in May; the last time it was this rate was back in January 2022. Nick Bunker, the economic research director for North America at the Indeed Hiring Lab, said May's rate was "still quite low historically."
Still, Joseph Briggs, an economist at Goldman Sachs, told BI that while rate cuts "have been delayed somewhat by the stickier Q1 inflation, we do think that we're still on track two this year starting in September."
Powell previously outlined what it would take to cut rates. During May's press conference following the FOMC's decision to hold rates steady, Powell said there were two paths that would give the Fed enough confidence to cut rates: more data to show inflation is getting closer to the Fed's 2% target or an "unexpected weakening in the labor market."
"If we did have a path where inflation proves more persistent than expected, and where the labor market remains strong but inflation is moving sideways, and we're not gaining greater confidence, that would be a case in which it could be appropriate to hold off on rate cuts," Powell said.
David Kelly, the chief global strategist at J.P. Morgan Asset Management, also told BI last week that two rate cuts could happen this year.
"I think that there'll be enough softness and coolness in the economy for them to begin to cut rates this year," Kelly said. "And if I had to bet, I bet that we will get two rate cuts, one in September and one in December."
Some Democratic lawmakers have been pushing the Fed to cut rates and give Americans some breathing room, especially after the European Central Bank cut rates earlier in June for the first time in five years. In a letter to Powell on Monday, Sens. Elizabeth Warren, Jacky Rosen, and John Hickenlooper pointed to the ECB's actions as a sign that it was time for the US central bank to follow suit.
"The Fed's decision to keep interest rates highs continues to widen the rate gap between Europe and the U.S, as the lower interest rates could push the dollar higher, tightening financial conditions," they wrote, adding: "You have kept interest rates too high for too long: it is time to cut rates."
FAQs
The Fed lowers interest rates in order to stimulate economic growth, as lower financing costs can encourage borrowing and investing. However, when rates are too low, they can spur excessive growth and subsequent inflation, reducing purchasing power and undermining the sustainability of the economic expansion.
What is the Fed going to do with interest rates? ›
The Federal Reserve has decided to hold interest rates steady after its meeting on June 11 and 12, 2024. The federal funds target rate has remained at 5.25% to 5.5% since July 2023. To combat inflation, the rate was raised 11 times between March 2022 and July 2023.
What is the impact when the US Federal Reserve rises the interest rate? ›
Higher interest rates can make borrowing money more expensive for consumers and businesses, while also potentially making it harder to get approved for loans. On the positive side, higher interest rates can benefit savers as banks increase yields to attract more deposits.
What are the effects of the Fed rate decision? ›
Late last year, the Fed was widely expected to cut the benchmark federal-funds rate in 2024 as many as six times. But at the conclusion of its June 11 and 12 policy meeting, the central bank announces that it's keeping its rate target between 5.25% and 5.5%—right where it's been since July of 2023.
What would happen if the Fed reduces interest rates? ›
Lowering rates makes borrowing money cheaper. This encourages consumer and business spending and investment and can boost asset prices. Lowering rates, however, can also lead to problems such as inflation and liquidity traps, which undermine the effectiveness of low rates.
Will the US reduce interest rates? ›
The US Federal Reserve has signalled that it will cut its key interest rate just once this year despite inflation easing. Back in March, the central bank had been expected to reduce borrowing costs three times by the end of 2024.
What's going to happen to interest rates? ›
The first move up to 0.25 per cent came in December 2021 and a sharp series of rises from the MPC followed, driving base rate all the way up to 5.25 per cent in August 2023. Rates have remained on hold since then and are forecast to soon start to fall.
Will interest rates keep going up? ›
Mortgage rates may continue to rise in 2024. High inflation, a strong housing market, and policy changes by the Federal Reserve have all pushed rates higher in 2022 and 2023.
How will the Fed decision affect stocks? ›
For investments, higher interest rates tend to cause company earnings and stock prices to fall (unless it's the financial sector). Raising rates can potentially cause a recession.
Will CD rates go up in 2024? ›
Projections suggest that we may see no rate increases in 2024, and that the Fed might start dropping its rate later this year, according to the CME FedWatch Tool on June 11. If the Fed rate drops, CD rates will likely follow suit, though it's up to each bank and credit union if and when that occurs.
When Will Mortgage Rates Go Down? Mortgage rates are expected to decline when the Federal Open Market Committee cuts the benchmark interest rate, which is likely to happen in the second half of 2024.
Do banks make more money when interest rates rise? ›
With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.
How does federal interest affect my bank account? ›
After the central bank raises its rate, financial institutions tend to pay more interest on high-yield savings accounts to stay competitive and attract deposits. Conversely, after the Fed lowers its rate, banks tend to lower their deposit account rates.
What is the Fed rate today? ›
What is the current Fed interest rate? Right now, the Fed interest rate is 5.25% to 5.50%. The FOMC established that rate in late July 2023. At its most recent meeting in June, the committee decided to leave the rate unchanged.
What can be the result of too much money in circulation? ›
Instead of tightening the money supply to stop inflation, the government or central bank might continue to print more money. With too much currency sloshing around, prices skyrocket. Once consumers realize what is happening, they expect continued inflation. They buy more now to avoid paying a higher price later.
Will stock prices go up if the Fed cuts rates? ›
“Typically, small-caps should be growing faster than your average large-cap stocks and historically have done better when the Fed is cutting rates.”
What happens to mortgage rates when Fed cuts rates? ›
"When the first cut happens, there will also be an immediate reaction from the bond market, and mortgage rates will drop," says Cohn. Obradovich says the impact of a potential rate cut would be dramatic and immediate as the market repositions itself based on new Fed policy and guidance.
What does cutting interest rates do to inflation? ›
If the Fed cuts rates too soon, Powell cautioned, inflation could re-accelerate, forcing the policymakers to reverse course and impose punishing rate hikes. But if the Fed waits too long to reduce borrowing costs, it risks weakening the economy so much as to potentially cause a recession.
What happens to bonds when Fed cuts interest rates? ›
Corporate bonds have outperformed government bonds, on average, in the more economically-rosy scenario. The range of historical returns is wide for stocks and bonds, but both have tended to do well when the Fed has started cutting rates.
