Federal Reserve Chairman Jerome Powell said interest rate cuts could begin soon.
Oliver Contreras/for The Washington Post via Getty Images
The Fed's key interest rate is the federal funds rate, the rate banks are supposed to charge each other for overnight loans to maintain required reserves. Since the Fed meeting in July 2023, it has been at 5.25% to 5.5%.
The Fed Funds are the basis from which all US interest rates are derived.
No Fed rate cuts?
Vanguard chief economist Roger Aliaga-Díaz said in March that the Fed might even refrain from cutting interest rates altogether this year. “The U.S. economy has proven far more resilient than anyone could have expected, despite the Fed’s efforts to cool it,” he said.
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“The Goldilocks outcome of strong growth and lower inflation was achieved through a timely expansion of the supply side of the economy. “These are primarily better-than-expected gains in workforce and productivity.” And these factors are not going away, he said.
Torsten Slok, chief economist at Apollo Global Management, went even further than Aliaga-Diaz, predicting no rate cuts this year rather than just saying it was a possibility.
“The bottom line is that the Fed will spend most of 2024 fighting inflation. As a result, fixed income yield levels will remain high,” Slok wrote in a commentary quoted by Bloomberg.
The story goes on
“The market must now recognize that the data situation is simply not slowing down and the Fed is changing course [toward a tighter policy] has provided additional tailwind to the economy, financial markets and financial conditions and capital markets,” he told Bloomberg separately.
Goldman Sachs is changing its mind on interest rates
Economists at Goldman Sachs previously expected the Fed's first rate cut to occur in December 2024. In mid-December 2023, the company changed that outlook, saying the Fed would cut interest rates three times, with the first cut coming in the third quarter of 2024, and four cuts in February, with the first scheduled for May.
The influential investment firm's updated forecast now calls for three interest rate cuts this year, the first of which will be in June. They also expect four cuts in 2025 and one in 2026. Their forecast for final interest rates is 3.25% to 3.5%.
Further economic analysis:
In the meantime, “we are rethinking neutrality [federal funds] “The federal funds rate is likely to be the Fed’s next big debate,” they said. The Fed Funds interest rate is the interest rate for interbank overnight loans. This is the interest rate that the Fed adjusts to continue its policy.
The Fed's interest rate target is currently 5.25% to 5.5%. And the neutral interest rate is 2.5%. The neutral interest rate is the prevailing interest rate when inflation and unemployment reach near-optimal levels, so the Fed does not have to raise or lower interest rates.
“We expect [Fed officials] “They need to raise their estimates of the long-term neutral rate because the econometric estimates of the neutral rate that Fed staff track have increased,” the economists said.
“We also expect Fed officials to conclude that short-term neutrality is higher than long-term neutrality because the fiscal deficit is much larger than usual.” And overall financial conditions have not tightened in line with the rise in the federal funds rate, which limits the transmission to the economy.”
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