The Waiting Game Continues - Fed Pencils in One Rate Cut by Year End [VIDEO]

At its June 12 policy meeting, the Federal Reserve left short term interest rate unchanged, and penciled in one rate cut in 2024.  In terms of interest rates cuts, the waiting game continues...

The Federal Reserve last raised short-term interest rates 11 months ago, and has kept them unchanged ever since. Prior to the current pause, the central bank raised rates by a total of +5.25% over a 17-month period. That was the fastest and most aggressive rate-hiking campaign in decades.  Now the focus has shifted to the timing of anticipated interest rate cuts.

The Fed's monetary policy decisions generally hinge on inflation and employment data. The central bank has two main objectives: (1) price stability and (2) full employment. Price stability means low and stable inflation. Full employment means economic conditions that create jobs and keep unemployment low. One of the tools the Federal Reserve uses to support these goals is adjusting short-term interest rates. Rate hikes are often used to combat inflation, while rate cuts are used to stimulate the economy.

During the 17-month tightening cycle, the Federal Reserve focused on combating high inflation rates. As inflation eased, the central bank’s attention shifted toward its full employment goal. Higher interest rates were expected to lead to higher unemployment, and thus eventual interest rate cuts. To the contrary, the unemployment rate has remained relatively low and currently stands at 4% (May 2024).  Inflation, on the other hand, has proven to be stickier then the Fed would like.  While the inflation rate has fallen from 9.1% to 3.3% over the last two years, the Fed would like to see if fall further.  The combination of low unemployment and above target inflation has kept interest rates higher for longer.

Figure 1 graphs the time between the final rate hike and the first rate cut of previous tightening cycles:

These ‘pause periods’ ranged from 4 months in 1989 to 15 months in 2006, and 18 months in 1997. Compared to prior cycles, the current 11-month pause is longer than average, but not wildly so.

While higher rates for longer persists, the economy and equity markets continue to exhibit strength and resilience.

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