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Why the Federal Reserve Won’t Cut Rates Until the End of the Year

Daniel Kim Views  

Reuters-Yonhap

After maintaining the highest benchmark interest rate (5.25-5.5%) in 23 years for seven consecutive times, the Federal Reserve System (Fed) suggests that people may have to wait until the end of 2024 for lower interest rates.

President of the Federal Reserve Bank of Minneapolis Neel Kashkari mentioned the timing of the interest rate cut during his appearance on CBS on June 16. He agreed with the market’s projection that the Fed will cut the rate once in 2024 and that people will have to wait until December, calling it a “reasonable expectation.” He insisted, “We need to see additional evidence that the inflation rate is slowing down to our target of 2%.”

After the Federal Open Market Committee (FOMC) meeting on June 12, the Fed kept the benchmark interest rate at the existing 5.25-5.5% and released the quarterly dot plot of the FOMC members. The dot plot is a chart that shows the members’ expectations for the appropriate interest rate at the end of each year.

In the dot plot released last March, the FOMC members expected three rate cuts for 2024. However, in the dot plot released on June 12, they predicted that even if the rate is cut for 2024, it will only happen once. Four FOMC meetings stand remaining for the rest of 2024. These include July, September, November, and December.

A hawkish figure who believes that the Fed should not artificially intervene in the market and that raising interest rates should reduce the money supply, Kashkari had voting rights at the FOMC meeting for 2023 but not for 2024.

Kashkari emphasized, “We are in a good position to secure additional indicators related to inflation, the economy, and the labor market before making any decisions.” He was surprised that the U.S. job market remained robust even though the Fed had aggressively raised interest rates and restrained household and corporate borrowing in 2022-2023. Kashkari stated, “I hope we can return to a balanced economy through a gradual cooling process.” He explained that housing prices would rise if the interest rate were cut to support home ownership. He also analyzed that it “won’t make it easier to buy a house” with a rate cut.

Kashkari further explained, “The best thing we can do is lower the inflation rate to our target, and then we can hope to step in to build the houses that Americans need from the supply side of the economy.”

The Consumer Price Index (CPI) for May in the U.S., released on June 12, increased by 3.3% compared to the same month last year, which was lower than the increase in April and the market forecast (3.4%), and closer to the Fed’s target of 2%. President of the Federal Reserve Bank of Cleveland Loretta Mester, a hawkish figure similar to Kashkari but has voting rights at the FOMC for 2024, mentioned the recent inflation rate in an interview on June 14. She argued, “We need to see positive inflation indicators for a few more months before we can cut interest rates.” Mester said, “It will take time to return the inflation rate to 2% fully,” and “we may not reach 2% until 2026, but progress will continue.” She evaluated, “Then we can say it’s time to start cutting interest rates.”

Daniel Kim
content@viewusglobal.com

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