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The Waiting Game: Interest Rate Cuts on the Horizon [VIDEO] Thumbnail

The Waiting Game: Interest Rate Cuts on the Horizon [VIDEO]

The University of Michigan publishes a monthly Survey of Consumers that assesses the confidence and expectations of U.S. consumers. It asks questions about current economic conditions, expectations for the future, and consumers' attitudes toward making big purchases. There was a notable development in the December 2023 survey, as the percentage of consumers expecting lower interest rates over the next 12 months rose to nearly 30% from 12% the prior month:

Chart - % of Consumers Expecting Lower Interest Rates

The expectation for lower interest rates is connected to easing inflation and the view that the Fed will cut interest rates sometime this year. This shift in expectations has the potential to impact consumer and business behavior.

The combination of lower inflation and lower interest rates has the potential to stimulate consumer spending and demand. Additionally, the housing market could pick up if mortgage rates decline on the heels of rate cuts.  With financing costs projected to decline, businesses may decide to start new projects, expand operations, or move forward with projects that have been on hold. Overall, lower interest rates have the potential to stimulate demand and help stabilize the economy after Fed’s aggressive rate hikes over the last two years.

At its January meeting, the Federal Reserve held interest rates steady and hinted that rate hikes are likely finished for the current cycle. While both actions were expected, the central bank stated that it wants further confirmation that inflation is moving towards its 2% target before cutting rates. Investors were a bit surprised by the statement after seeing inflationary pressures ease over the past six months. What more does the Fed want to see? Fed Chair Powell wasn’t particularly clear, although he reiterated that inflation is moving in the right direction. 

The Fed’s latest comments provide it with the flexibility to cut rates if inflation continues lower or to keep rates at current levels if inflation proves stickier than expected.  Although the future path of interest rates remains uncertain, cuts by the Fed are still widely expected in 2024. 

Investors and economists are anxiously awaiting the Fed’s next steps, but it appears we will all have to continue to wait at least a bit longer.

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