If you are wondering when the Federal Reserve will start cutting interest rates in 2024, you are not alone. Many investors and consumers are eager to see lower borrowing costs after two years of rapid rate hikes that have pushed mortgage and credit card rates to their highest levels in decades.
But the timing of the first rate cut is not so clear, as the Fed faces a delicate balance between fighting inflation and supporting economic growth. The majority of economists concur that the Fed will begin reducing rates at some point in the second quarter of 2024, most likely during its June meeting, based on the most recent economic and market projections.
When Will the Fed Cut Rates in 2024?
The Fed began raising rates in March 2022 to combat high inflation. Since then, the Fed has increased the federal funds rate by 5 percentage points, from 0.25% to 5.25%, and has also sold off about $1.3 trillion from its long-term securities portfolio, a process known as quantitative tightening. These actions have helped bring down inflation to 3.1% in January 2024, but that is still above the Fed's target of 2%.
The Fed has signaled that it wants to see more evidence that inflation is under control before it begins to cut rates. Fed chair Jerome Powell told CBS News' “60 Minutes” earlier this month that the central bank wants to have more confidence that inflation is receding “before we take that very important step of beginning to cut interest rates.” The Fed also wants to avoid cutting rates too soon and risk reigniting inflationary pressures.
However, the Fed also has to consider the impact of its rate hikes on the economy, which has slowed down in recent quarters. The US gross domestic product (GDP) grew by 2.6% in 2023, down from 3.1% in 2022, and is expected to grow by only 1.9% in 2024, according to the latest projections from the Congressional Budget Office (CBO). The unemployment rate has risen slightly from 3.5% in December 2022 to 3.8% in December 2023, and is expected to rise further to 4.1% by the end of 2024.
Challenges and Considerations Ahead
The Fed has acknowledged that the economy is facing some headwinds, such as supply chain disruptions, labor shortages, geopolitical tensions, and the spread of new variants of COVID-19. The Fed has also said that it is monitoring the financial conditions and the risks of a possible correction in asset prices, which have soared to record highs in recent years.
Market Expectations and Analyst Insights
So when will the Fed make its first move? Based on the latest market expectations and economic forecasts, most analysts agree that the Fed will start cutting rates sometime in the second quarter of 2024, most likely at its June meeting. However, some analysts think that the Fed could act sooner, as early as March or May, if inflation cools down faster than expected or if the economy shows signs of weakness. Others think that the Fed could wait longer, until July or September, if inflation remains sticky or if the economy proves resilient.
Potential Rate Cut Scenarios by Fed
The pace and magnitude of the rate cuts will also depend on how the economic situation evolves over time. Some analysts expect the Fed to cut rates aggressively, by as much as 200 basis points (2 percentage points) by the end of 2024 and another 200 basis points by the end of 2025. Others expect the Fed to cut rates more gradually, by only 100 basis points (1 percentage point) by the end of 2024 and another 100 basis points by the end of 2025.