The Federal Reserve has been raising interest rates for the past 17 months, and consumers will likely not see rates go back down in the near future, according to economists.
The Fed’s interest rate target is now up to 5.25% to 5.50%, the highest it has been since the dot-com bubble around the turn of the century. The higher interest rates have directly affected consumers, making things like credit cards more difficult to pay off and pushing housing affordability out of the reach of many families.
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So when is the Fed going to start slashing rates and end its tightening cycle? Not anytime soon, most investors and economists predict.
To understand why interest rate relief might not come until months from now, one has to consider why the Fed has been hiking rates. Inflation exploded after the Fed kept rates at near-zero levels for two years during the pandemic. In fact, the pace of annual consumer price growth shot as high as 9.1% in June 2022.
To tame prices, the Fed has had to push rates ever higher. In some instances, and in a sign of just how desperate the situation had become, the central bank even raised rates at three times the scale of conventional increases in just one meeting.
The Fed is aiming for 2% inflation, and while the headline consumer price index number is now running at 3.2%, other measures of inflation are remaining higher, and the Fed has indicated it will keep rates at their high level, or even move them higher, if inflation doesn’t keep showing signs of dropping.
Fed Chairman Jerome Powell addressed the future of the central bank’s monetary policy on Friday during his hotly anticipated annual address from the Jackson Hole Symposium. Notably, he left the door open to more rate increases down the road despite most investors expecting rates to have peaked.
But what was also notable is what Powell didn’t say. He didn’t even briefly mention a timeline for when rates might start coming down, which may frustrate some investors hoping for lower rates on the horizon.
In fact, most economists, investors, and Fed watchers don’t expect rates to come down until part of the way into 2024.
After the speech, Bill Adams, chief economist for Comerica Bank, noted that Powell has set a high bar for starting to withdraw monetary policy. He said Powell made it clear that the Fed will want to see a broad-based slowdown in price pressures, including wages, before it does so.
“The Fed would rather keep interest rates too high for too long than cut rates prematurely, allow inflation to rebound, and be forced to extend the current period of pain from concurrently high interest rates and high prices,” Adams said. “There is a good chance this scenario plays out in 2024, which is why Comerica forecasts gradual rate cuts next year.”
Investors’ insights can be gleaned through the CME Group’s FedWatch tool, which calculates the probability of where rates will be down the road using futures contract prices for rates in the short-term market targeted by the Fed.
An overwhelming majority, more than 80%, of investors think the Fed will pause at its next meeting in September. But from there, it gets a little more mixed. Nearly 60% of investors think that rates will be higher than today after the Fed’s November meeting, and just over half think rates will be higher than now as we enter 2024, with a mere 3.8% betting that the Fed will have cut rates by then.
Moving into 2024, just under 40% think that rates will be lower than their current level come May, with 60% of investors expecting them still to be as high or higher nine months from now. By June though, that dynamic shifts, and most expect the Fed to have begun cutting rates, with 92% of investors predicting rates will be lower about a year from now.
About 55% of investors think the Fed’s interest rate will be at least a whole percentage point lower than it is now by the end of 2024.
Andrew Patterson, a senior economist with Vanguard, thinks more than one rate hike might happen this year before the Fed starts pruning rates sometime next year.
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“We believe the Fed will remain vigilant and data dependent in determining whether rates sustained at current levels for a longer period of time or further rate rises will be needed,” he said in a statement. “Our baseline is for the latter, another 1-3 hikes are possible over the next several months and into next year before leaving them on hold for some time and only cutting when broader macro conditions weaken, resulting in a shallow recession.”
The Fed’s next meeting will be held on Sept. 19 and 20. All eyes will be on next month’s inflation reports for August, which will likely be the major determinant in whether the Fed holds rates steady or opts for another rate increase.