The first cut is the deepest
Within a few hours of this email landing in your inbox, the Federal Reserve will announce its latest interest rate decision. A consensus has been built around a maintaining of the status quo, with the majority of economists expecting Jay Powell & co. to keep rates at their 23-year high of 5.25-5.5%.
However, even if rates stay put, the Fed might give clues on when the all-important cut might come: a big deal for everyone who has a credit card, a mortgage, a student loan or any other debt with a variable interest rate.
Waiting game
Battling inflation, the Fed embarked on a hiking cycle that's been unprecedented in modern times. As we entered 2024, a slew of traders were betting on a rate cut as early as March. Yet, with inflation exceeding forecasts in both January and February, a June rate cut has become the latest expectation.
The Fed's push, elevating its effective fund rate by 525 basis points in less than 18 months, filtered through to all dollar-denominated borrowing, but it had a particularly profound impact on currency markets, where depositors rushed to hold newly attractive high-yielding dollars; housing, which has left some homeowners paralyzed by “golden handcuffs”; and the Treasury’s own finances.
The task ahead remains a balancing act: avoid keeping rates high for so long that it stifles the US economy, but don’t cut prematurely and risk reigniting the inflation spark.
Zoom out: Japan hiked its interest rate for the first time in 17 years yesterday, ending its era of negative rates.
