Fed closes with maximum rates: When will they fall?

After a frenetic 2022 with seven rate hikes worth 425 basis points, US Federal Reserve (Fed) he made four more this year, an adjustment of another hundred points that apparently ended it bull streak and that opens 2024 with the expectation of a reduction, even if it happens slowly.

At the last session of the year held on December 13 and 14, members of the Association Federal Open Market Committee (FOMC) The US regulator, the body in charge of deciding whether to raise rates or not, decided to keep them in a range of 5.25% to 5.5%, their highest level since 2001.

True to his cautious rhetoric, US central bank chairman Jerome Powell warned at a press conference after the latest announcement that while this may be the “maximum rate of this cycle” or “close to it”, economic data will continue to be closely watched. analyze how monetary policy would be decided at each meeting.

As for possible future cuts, the median prediction Fed governors – which may hint at but not necessarily mean cuts – indicates that rates will be at 4.6% in 2024 (equivalent to a range of 4.5% to 4.75%), before decreasing by one point in 2025. to 3.6%, and reach 2.9% in 2026.

When will rates start to fall and how quickly will they do so?
According to most economists, the Federal Reserve will be conservative next year and will not make big cuts. They will be small from spring or the second half of the year.

“I don’t think they will make cuts in the first half of 2024, assuming the recession doesn’t start at the beginning of the year. My guess is that it won’t cut much or maybe at all if inflation stays above 2.5% in 2024, which is likely, Charles W. Calomiris, a professor at Columbia Business School, told EFE.

The economist believes that there will be no more increases and that now the governors of the FED “They are more worried about the recession” but will be “patient to allow inflation to remain between 2.5% and 3% through 2024.”

For Kenneth Kuttner, professor at Williams College in Massachusetts, the end of the climb is not so clear. “My opinion was that they would have to go up a bit more, an additional 25 basis points, because the economy is still quite strong and inflation is above target, but I could be wrong because the effects of the increase are yet to be seen,” he told EFE.

As for the down time, Kuttner doesn’t think so Federal Reserve will cut rates until it sees a more tangible move in inflation back to the 2% range, something that won’t happen “until mid-2024,” he estimated.

According to the latest inflation data for November Consumer Price Index (CPI) In November, it was 3.1%, which is one tenth less than in October.

Will interest rates one day return to near zero, as happened in 2020 due to the pandemic? According to Kuttner, it is not something that is in sight, although there is always room for uncertainty.

“In the absence of a major shock, such as a financial crisis or a pandemic, the chances of returning to a zero-rate situation are slim, but there is never a guarantee that we won’t have another crisis or pandemic,” he said.

According to economist Richard Roberts, professor at Monmouth University, the Federal Reserve “will leave interest rates at current levels until we see core inflation systematically at 2.25% or less,” he told EFE.

The annual rate of core inflation, which measures price growth without taking into account energy or food – and is one of the indicators the Fed focuses on most in its decision-making – remained at 4% in November.

According to their calculations, this “could happen in late 2024, but is more likely to happen in 2025.”

Still, he added, “in the unlikely event that the economy begins to slide into what appears to be a deep and prolonged recession, the Federal Reserve could consider cutting interest rates regardless of the rate of inflation.”

In 2023, growth figures of NOW They were far from recession. In the third quarter, the country grew by 1.2% at an annual rate of 4.9%. These figures are better than those from the second quarter, when it rose 0.5% on the quarter, at an annual rate of 2.1%.

In addition, unemployment has not been significantly affected by rate increases since March 2022. In November, the rate fell two tenths to 3.7% and 199,000 new jobs were created, 49,000 more than those created a month earlier, which is a solid number.

According to the forecasts of the investment bank UBS, Federal Reserve It will start easing its monetary policy next year, and will cut rates by 275 basis points in 2024.

Projections from ING Economics show the Fed will cut interest rates at least six times in 2024, with the cuts starting in the second quarter, while four more 25-basis-point cuts will follow in 2025.