In an attempt to slow the economy down enough to bring it under control, the Fed may decide to retain its benchmark interest rate at its current 23-year high or even raise it if inflation proves to be more persistent than anticipated.
When the Federal Reserve last projected the trajectory of its widely followed fed funds rate, they factored in three quarter-point rate reductions by year’s end, bringing the rate down from its current range of 5.25–5.5% to a range of 4.5–4.75%. Presently, financial markets anticipate the same, as per the FedWatch tool.
The Fed Rate-Cut Expectations Have Boosted The Economy
Chief economist at banking firm Apollo, Torsten Slok, is one of those who is betting against the Fed and claiming that it won’t lower rates at all this year. Slok maintained that inflation pressures remain high and the Fed has no reason to lower rates given that the economy is expanding faster than anticipated and that a long-awaited recession is not in sight.
ironically, market expectations of Fed rate cuts have boosted the economy and made those cuts less likely, he argued.
“The market came into 2023 expecting a recession. The market went into 2024 expecting six Fed cuts. The reality is that the U.S. economy is simply not slowing down, and the Fed pivot has provided a strong tailwind to growth since December,” he wrote Friday in a research note. “As a result, it will not cut rates this year, and rates are going to stay higher for longer.”
One example of that tailwind rate cut expectations have pushed down interest rates on mortgages from their peak in late October, leading to a slight resurgence in the housing market.
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