The Federal Reserve faces a critical decision on whether to raise interest rates again in July 2024 amidst signs of cooling inflation and a slowing economy.
Points
- Inflation data and Non-Farm Payroll figures influence the Fed’s decision.
- Economists predict a potential rate cut in September 2024.
- The Fed’s dual mandate aims to balance price stability and maximum employment.
As the Federal Reserve’s July 2024 meeting approaches, all eyes are on whether the central bank will raise interest rates again. Recent economic indicators, including cooling inflation and revised Non-Farm Payroll figures, suggest that the Fed may hold off on further rate hikes. According to FactSet, about 9 out of 10 economists believe the first rate cut will occur in September. The FedWatch rate has also shifted in this direction, influenced by the latest inflation data and the downward revision of Non-Farm Payroll figures.
Economic Indicators and Predictions
Ryan Sweet, Chief U.S. Economist at Oxford Economics, noted that the rate cut process is gaining acceptance and that we might hear discussions about a September cut at the July meeting. Although Fed members foresee only one rate cut for this year, inflation figures announced before and after this projection could change the outlook in favor of a cut.
The CME FedWatch tool suggests that there could be cuts in the September, November, and December meetings due to faster-than-expected falling inflation. The probability of three rate cuts in 2024 is currently 64%. The previous dot plot released by the Fed for 2024 indicated a median cut estimate of 75 basis points, suggesting three cuts. Poor economic data in the first quarter had led to a revision against risk markets.
FedWatch Rate Predictions | Source: Coin Turk
After inflation peaked at 9.1%, a 40-year high, it has now dropped to 3%. This significant decrease, combined with Fed Chairman Jerome Powell’s recent statement, “We will start cutting before it drops to 2%,” shows that
expectations for a September rate cut are not unreasonable. Indeed, the Fed is now holding meetings where the risks of excessive tightening are also being discussed.
The Fed’s Dual Mandate
The Federal Reserve has two primary objectives, known as its dual mandate: to keep prices stable, thereby preventing abnormal fluctuations in inflation, and to achieve maximum employment. With inflation now down to 3%, the urgency for an immediate rate cut driven by excessive employment loosening seems reduced. However, the employment situation has loosened in this process, meaning that if the Fed keeps markets tight for longer, it could fulfill one mandate while compromising the other. Fed Chairman Powell is undoubtedly keen to avoid this scenario.
Rate Cut Predictions
CME FedWatch suggests that there could be cuts in the September, November, and December meetings due to faster-than-expected falling inflation. The probability of three rate cuts in 2024 is 64%. Indeed, in the previous dot plot announced by the Fed for 2024, the median cut estimate by members was 75bp, indicating three cuts. Poor data in the first quarter had led to a revision against risk markets.
FedWatch Rate Predictions | Source: Coin Turk
Conclusion
The Federal Reserve’s upcoming decisions on interest rates are being closely monitored by economists and investors alike. While the current data suggests a potential rate cut in September, the Fed’s actions will ultimately depend on how inflation and employment figures evolve in the coming months. The central bank’s challenge remains to balance its dual mandate of price stability and maximum employment without triggering economic instability. As we move closer to the July meeting, the anticipation builds around the Fed’s next steps in navigating this complex economic landscape.