The Federal Reserve kept interest rates steady at their January meeting. When will they finally start cutting rates?
When will the Federal Reserve cut interest rates? This is a question that every analyst, economist, investor, or simple market observer is asking themselves right now. After years of high interest rates, when will this cycle finally come to an end?
The Federal Reserve is the US central bank and controls the monetary policies of the United States. The US dollar is the global reserve currency, and therefore the most important currency in the world. For this reason, the decisions taken by the Fed are closely watched by the entire world.
After the Covid-19 pandemic, a period of significant inflation hit the United States and the Western world in general. This was caused by the sudden exposure to the market of trillions in savings during the pandemic years. The US population is a historically consumeristic society and did not think twice before starting a massive spending spree.
Then, the Russian invasion of Ukraine worsened the situation. Russia is one of the world’s largest oil and gas exporters. The economic isolation attempted by the West after the invasion backfired, increasing energy prices in the US and especially in Europe.
For all these reasons, the Federal Reserve implemented a swift and effective tightening policy. Between March 2022 and June 2023, the Fed increased interest rates to a multi-decade-high of 5.5%.
Now, inflation is finally cooling in the United States, hovering around the 3% level. So the question remains: when will the Federal Reserve start cutting rates?
When will the Fed start cutting rates?
At their latest meeting on January 31st, the Federal Reserve left rates at the current level. In his post-meeting speech, Fed Chairman Jerome Powell said inflation was progressing on promising levels. The Fed does not, however, see a stable decline, and will hold rates steady until inflation is on a clear path towards the 2% target.
Before answering when it would be appropriate ask why should the Fed cut rates. The US economy keeps outperforming market expectations and foreign competitors. GDP growth in the last quarter was double what Wall Street expected, and unemployment remains very low across the entire country.
Usually, interest rates are cut when the economy needs a boost, and the United States clearly does not. The only good reason to cut rates at the June meeting would be to launch a positive message before the 2024 US elections in November.
Although extremely unlikely, a recession could still hit the United States, even a mild one. And if Joe Biden wants any chance of being reelected, the Fed needs to avoid any possible economic contraction.
This makes June the perfect moment to start cutting rates. Obviously, this is only speculation and cannot reflect reality. The Fed will evaluate this decision only based on monthly economic data.
