The Federal Open Market Committee (FOMC) is expected to maintain interest rates at a 23-year high in their upcoming meeting, with potential revisions to their 2024 rate cut estimates, possibly showing fewer cuts or none at all. This stance reflects persistent inflation and a resilient economy, which complicate the Fed’s plans.
The FOMC’s anticipated decision to hold interest rates at 5.25–5.5 per cent aligns with ongoing inflation challenges. Inflation, after hitting a two-year low of 3 percent in June 2023, has since rebounded to 3.4 percent in May 2024. This stubborn inflation has kept policymakers cautious about cutting rates too soon.
Originally, the Fed projected three rate cuts for 2024, but this outlook is likely to change. With only four rate-setting meetings left after June, rapid rate cuts appear unnecessary in a still-growing economy with persistent inflation. A more likely scenario is a reduction to two cuts, with even one or no cuts being a possibility, depending on economic conditions.
The rationale behind any future rate cuts is critical. Ideally, cuts would result from inflation nearing the Fed’s 2 per cent target without harming employment. However, cuts driven by a weakening job market or a broader economic slowdown are less desirable. Recent labour market data shows some cooling, with job openings and unemployment rates fluctuating, but hiring remains robust.
For consumers, stable rates mean continued high financing costs for loans and credit cards, emphasising the importance of paying down high-interest debt. Savings vehicles like high-yield savings accounts and certificates of deposit (CDs) offer attractive returns, with some yielding over 5 per cent, providing a good opportunity for consumers to grow their savings.
Fed officials are cautious about cutting rates too early. Cleveland Fed President Loretta Mester and Minneapolis Fed President Neel Kashkari suggest a lower likelihood of multiple cuts, while Dallas Fed President Lorie Logan and Richmond Fed President Thomas Barkin emphasise the need for more data before deciding on rate cuts.
Distinguishing between a normalising economy and one at risk of recession is challenging. We expected the post-pandemic economic boom to cool, and although the current deceleration appears orderly, it causes discomfort. Rising consumer loan delinquencies and shifts in unemployment rates are indicators to watch, but historical context suggests current levels are not alarming.
Consumers should focus on:
While the Fed’s precise actions remain uncertain, the emphasis is on managing high-interest debt and leveraging savings opportunities. The economic landscape requires careful navigation, with both the Fed and consumers adapting to evolving conditions.