Is The Fed Finally Ready to Start Cutting Interest Rates?
By Dan Nastou, CFA
It’s now been over two years since the Federal Reserve, or Fed, began aggressively hiking interest rates to combat the worst inflation the US had seen in forty years.
So far, its efforts seemed to have worked.
Inflation has cooled significantly since it peaked at over 6% in 2022. The most recent CPI report showed that prices for consumer goods and services rose by just 0.2% for the month of July and 2.9% from one year ago. And the most recent Producer Price Index report showed similar results.
The Fed targets 2% annual inflation. So while we can’t quite claim victory just yet, and inflation could pick up again, the Fed has clearly made substantial progress towards its goal.
So what happens next?
Barring anything extraordinary happening with the economy, it’s increasingly likely the Fed will start cutting interest rates at its next meeting on September 18th.
Financial markets are already pricing in a likely 25 basis point cut (a basis point is equal to one hundredth of a percent, so 25 basis points is equal to 0.25%). And some economic pundits are even wondering if a 50 basis point cut could be in the works. However at this point markets are pricing in a 0.25% cut as the most likely scenario.
It’s also important to note the Fed is currently holding its target interest rate in a range of 5.25-5.5%, which is well above what the Fed considers its “neutral” rate. In other words, more cuts will likely be on the way after September.
But we don’t know just how quickly these cuts will happen. The Fed doesn’t want to cut too quickly and risk a resurgence of high inflation. But at the same time, holding rates too high for too long could stifle the economy. It’s a delicate balancing act the Fed wants to get right.
What does this mean for you and me?
Well, interest rates directly impact us as savers, investors, and borrowers. They influence how much we can earn on our savings accounts, CDs, and our investments. And they’ll also play a role in determining what rate we’ll pay when we borrow money, say to buy a home.
So yes, falling interest rates will likely mean lower rates on savings accounts and CDs. But it will probably also mean declining mortgage rates. So just how much you’ll be impacted by the Fed cutting rates will depend somewhat on your specific situation.
However interest rates also impact the broader economy, sometimes in complex ways. Lower rates typically translate to lower borrowing costs for businesses, which may mean more growth and more hiring in the economy. But every economic cycle is a little bit different from the last. And trying to predict exactly how the economy will respond to rate cuts, or even rate hikes for that matter, is not exactly straightforward. So in general it’s best to have a long-term financial plan and stick with it, without trying to guess what the Fed is going to do.
Looking ahead
It’s looking more and more likely the Fed will start cutting rates at its September meeting.
But there’s still a lot we don’t know, like just how much they will cut if they do start, and what path future cuts will take. Also, it’s unlikely we’ll see the ultra low interest rates of the 2010’s again anytime soon, if ever. So don’t be surprised if the economic landscape is a little different from what we’ve seen in recent years. It’s all the more reason to have a solid financial plan that can get you through a broad range of economic environments. We can’t predict the future perfectly, but we can still make smart financial choices for whatever comes our way.
This content is intended for educational purposes and should not be taken as specific investment advice. Please talk to your financial professional if you need help or are thinking about making changes to your investments.
Looking for more?
