The Federal Reserve’s Interest Rate Policy in 2024

Despite recent inflation data signaling higher than anticipated inflation rates, Kristina Hooper, chief global market strategist at Invesco, believes that the Federal Reserve will likely initiate interest rate cuts by the end of the second quarter. The Fed has been increasing borrowing costs to combat high inflation levels seen during the pandemic. While inflation has started to decrease from its peak in mid-2022, it still remains above the target level of 2%. The dilemma now lies in when and how rapidly the central bank will begin lowering interest rates to prevent an economic downturn.

Hooper predicts that the Federal Reserve might reduce borrowing costs by the end of June with cumulative cuts ranging between 0.75 percentage points to 1 point in 2024. Drawing upon historical trends, she notes that following interest rate hikes in summer 2023, the Fed typically transitions to rate cuts approximately 8 ½ months later. Franklin Templeton’s president and CEO, Jenny Johnson, supports Hooper’s outlook, expecting rate cuts in the latter half of 2024, possibly in July or September. However, AllianceBernstein’s senior investment strategist, Moira McLachlan, revised their initial forecast from five or six rate cuts to three or four for the year. The firm’s current projection is cumulative cuts amounting to 1 percentage point in 2024.

Despite the adjustments in rate cut forecasts, many strategists foresee the United States avoiding a recession as it navigates the Federal Reserve’s interest rate policy. This optimistic outcome, often referred to as a “soft landing” in economic terms, is believed to be the likely scenario. McLachlan expresses confidence in the economy’s ability to sidestep a recession, a sentiment echoed by Hooper. However, Hooper also voices concerns that the Fed may delay rate cuts, potentially impacting the economy in the future.

The outlook for the Federal Reserve’s interest rate policy in 2024 suggests imminent rate cuts to counter persistent inflation levels. While strategists anticipate a soft landing for the economy, there are lingering doubts about the timing and effectiveness of the Federal Reserve’s monetary decisions. As the year progresses, market watchers will closely monitor the central bank’s actions and their impact on economic stability.