Implications of the FED Interest Rate Path of 3 Cuts in 2024

The Federal Reserve has recently signaled its intention to implement three rate cuts in 2024, raising questions about the implications of such a move and its potential impact on the economy, market reactions, and projected inflation rates. This article delves into the potential effects of these anticipated rate cuts and the subsequent adjustments in economic projections by Fed officials.

Our interpretation of the surprise signal of the FED to pivot to 3 cuts and telegraph this to the market is probably due to potential political considerations or maybe they know something that we don’t.

First, the potential political considerations arise from the US election cycle in 2024. Realistically this will restrict FED policy from rate cuts up until August at the latest. Otherwise, the FED might be accussed of interference in the election. Therefore, if the initial rate cuts were planned for June, July and later, why not push these earlier to March or April. The FED used the language they want to be ahead of business cycle thus implying cutting rates earlier. This will give them more wiggle room to make more cuts if needed before August.

Second, after a long period of zero or low interest rates, the FED maybe worried about something going wrong somewhere in the economy if rates are kept too high for too long. In short, they are worried about a negative event, perhaps commercial real estate, etc. Therefore, the risk of cutting too early outweights the risk of somthing going wrong and they want to mitigate this risk.

There is one other final reason, perphaps they are seeing some data or trends that justify an earlier cut. Perhaps the economy is slowing faster than expectations.

Finally the FED kept current interest rates unchanged for three straight meetings. Thus, we can assume talk to keep rates higher for longer is now over. The Federal reserve’s stance has turned dovish with signals that “inflation has eased.” Expect in the next year, the question is if it will be a soft landing.

Dangers of Cutting Rates too Early and Market Reactions

Firstly, the impact on the economy is expected to be significant. Rate cuts often lead to increased borrowing and spending, stimulating economic growth. However, excessive rate cuts can also result in inflation, a factor that needs to be carefully monitored by the Federal Reserve. Thus, there is a chance that we might even see a hike. Not likely, but still possible.

Market reactions to the announcement of three rate cuts in 2024 are likely to be mixed. Expect some of the riskier assets like the Russell 2000 stocks to see gains. However, the FED may be cutting rates earlier because the economy is slowing faster than expected and this will hurt sales and profits of companies. We are skeptical that consumers will keep on spending as credit card debt is high and eventually consumers will be hit along with corporate profits.

Effects on housing and mortgage rates will also be observed. Lower interest rates can make home ownership more affordable, potentially stimulating housing market activity and influencing mortgage rates. Thus, expect an intial pop in the real estate stocks, etc.

Commodities also went higher, especially precious metals like gold or platinium. Palladium also went up which by the way is recession signal. Besides prescious metals, oil and gas also went up.

Forecasts for interest rates at the end of 2024 will likely be adjusted in light of the potential rate cuts next year. For example, the market now thinks that the FED will cut 6 times in 2024.