Federal Reserve Interest-Rate Cut – When Will It Happen?

Federal Reserve Interest-Rate Cut

The financial markets are consumed with divining the timing of a Federal Reserve interest-rate cut, which would reduce the cost of borrowing for Americans. That’s because it affects mortgage rates, auto loans and credit cards as well as consumer and business investment spending. The Fed’s benchmark rate now stands at a 23-year high. The central bank is expected to lower it a few times this year.

Investors want the Fed to cut interest rates because they think the economy is slowing, and lower interest rates would help speed up growth. But officials also don’t want to cut rates too quickly, as that could cause inflation to rebound and bring on a recession.

That’s why many analysts believe the Federal Reserve Interest-Rate Cut will wait until a few more data points come in before making a move. The central bank’s next major announcement comes Wednesday afternoon, when it is widely expected to set a definitive end to a recent series of interest-rate hikes and perhaps announce a timetable for future rate cuts. The decision will be based largely on economic data that will come out over the next six weeks or so. The markets will be watching for a hawkish tone in the official statement and a clear signal from Fed Chair Jerome H. Powell, who will hold a news conference at 2:30 p.m. Eastern. Powell can either cement expectations for a rate cut at the next committee meeting in March or later this spring and summer, or leave both options open.

Federal Reserve Interest-Rate Cut – When Will It Happen?

The key question for investors is how long the Fed will need to gain confidence that inflation is trending toward its target of 2%. Last month, when the Fed was projecting three rate cuts this year, officials cautioned that they wouldn’t consider a reduction until they had “gained greater confidence that inflation is moving sustainably closer to our objective.”

Inflation has since cooled, but it remains above the central bank’s goal. And a few members of the Federal Open Market Committee have signaled that they worry about inflation becoming too hot again and bringing on a recession.

Investors are preparing for the possibility of a rate cut by buying up bonds, which pay out interest in return. Historically, when interest rates fall, bond prices rise. That’s because the returns on risk-free assets like cash and government bonds drop when interest rates decline, so investors seek out higher-yielding investments. But the Fed can’t rely solely on bond purchases to cut rates, as it needs to see signs of a strong economic recovery to justify such a move. The latest employment and retail sales data suggest a recovery is in the works, but it won’t happen soon enough for the Fed to cut rates again. For now, investors are betting that the central bank will wait until at least June. The median forecast of Wall Street traders is for a June cut. But the average price for a 2024 rate-cut futures contract is for a cut to take place in May.