Despite predictions that interest rates would fall in 2024, the Federal Open Market Committee has not cut them. Markets now anticipate that one or two interest rate cuts will come later in the year.
That’s because progress on lowering inflation is taking longer than expected. Despite relatively restrictive interest rates, the job market has remained robust, removing a concern that could have prompted rate cuts.
Recent Economic Data
Short-term U.S. interest rates currently stand at 5.25% to 5.5%. That peak level was set when the FOMC last raised interest rates in July 2023. Fixed income markets previously forecast rate cuts to start sooner in 2024.
The robust job market has given policymakers time to wait and see how inflation data trends. In 2024 so far, the numbers have not been particularly encouraging. After disinflation in late 2023, Q1 2024 inflation figures have shown a lack of progress. The next Consumer Price Index report is due on May 15.
Expectations For 2024 Interest Rates
Markets have dialed back their expectations for 2024 interest rate cuts following the tone of FOMC statements.
For example at the annual general meeting of the Foreign Bankers’ Association in April Federal Reserve Chair Jerome Powell said the labor market was “very, very strong.” Powell also noted that, “the first quarter was notable for its lack of progress on inflation.” On future monetary policy, Powell expected that “we’ll need to be patient and let restrictive policy do its work.”
When the FOMC’s Summary of Economic Projections was last updated in March, most policymakers expected two or three interest rate cuts in 2024. However, it’s likely fewer cuts will be projected at the FOMC’s next update. This will come at the conclusion of its upcoming meeting on June 12. Markets expect interest rates to be held steady in June.
Assuming that’s the case, that leaves four remaining meetings for the FOMC to potentially adjust interest rates in 2024. Currently, the most likely path appears to be that the FOMC cuts rates in September and December, according to the CME’s FedWatch tool. However, there’s also approximately a 10% chance that rates remain unchanged for 2024.
Mortgage Rates
Thirty-year mortgage rates nudged up to more than 7% in April 2024, as the Fed has held rates higher for longer. That’s still down from recent peak levels of almost 8% last October. But mortgage rates have been on a generally increasing trend since early 2022 and for most of 2024.
Of course, long-term interest rates incorporate the FOMC’s likely actions. If the FOMC were to cut rates sooner and more aggressively than expected, that could bring mortgage costs down. In contrast, if interest rates were further delayed, mortgage rates could still move higher. Where the FOMC sets the neutral interest rate level is also critically important to the 30-year mortgage market, given its long-term focus.
What To Expect
Despite delays relative to expectations, markets still expect one or two interest rate cuts in 2024. This implies that interest rates will remain relatively elevated, even at the end of the year.
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