Are Interest Rates Really Going Down In 2024?

Source: Business Insider

The market is about to take off again, expect lower rates but continued appreciation. Now may be the best time for affordability.

The Federal Reserve may find it necessary to lower interest rates beyond market expectations due to the challenges of moderating inflation, a slowing job market, and a less optimistic outlook for consumer spending.

According to James Knightley, ING's chief international economist, the current economic conditions, characterized by modest growth, easing inflation, and a cooling labor market, align with the Fed's preferences. However, the overall outlook is becoming increasingly unfavorable, suggesting a potential need for additional interest rate cuts to avoid further tightening of monetary policy.

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James Knightley anticipates the Federal Reserve initiating interest rate cuts in the second quarter of the upcoming year.

• He foresees a total of six rate cuts, each at 25 basis points, amounting to a cumulative reduction of 150 basis points.

• Knightley's outlook extends the interest-rate cuts into 2025, with a projection of at least four additional 25-basis-point cuts.

• Contrarily, the futures market suggests the Fed will implement rate cuts totaling 125 basis points in the next year.

• If Knightley's projections materialize, the effective Federal Funds rate is expected to be approximately 3.83% by the end of 2024 and 2.83% by the end of 2025.

• This contrasts with the current Fed Funds rate of 5.33%.

The anticipated rate cuts are expected to provide a stimulative effect on the economy, albeit not immediately, as adjustments to the Fed Funds rate typically manifest with a lag of 12-18 months.

Knightley's gradual approach to interest-rate reductions is promising, indicating resilience in the economy. This strategy contrasts with the drastic measure of reducing interest rates to 0% swiftly, a move often associated with a significant economic slowdown leading to a recession.

The positive aspect of Knightley's forecast lies in the belief that the economy won't necessitate an immediate descent to 0% interest rates, showcasing a more measured response to evolving economic conditions.

Knightley points out the ongoing solidity of the job market, exemplified by consistently low weekly jobless claims hovering around the 200,000 mark. However, he acknowledges a noticeable cooling trend in the job market.

Source: ING Economics

The data suggests a prolonged period of stagnant real household incomes. Currently, this has been counteracted by depleting savings and an increased reliance on debt to fuel spending growth, according to Knightley.

However, the prospect of tighter credit conditions and higher borrowing costs is likely to put significant pressure on the flow of credit to the household sector. Additionally, there is growing evidence that the accumulated excess savings from the pandemic era are being used up by an increasing number of individuals, as noted by Knightley.

This paints a picture of an economy teetering on the edge, although it has not yet reached a breaking point. The outcome may depend on the Federal Reserve's ability to successfully lower interest rates before the economy slides into a recession.

In conclusion, if the economy falters, the Federal Reserve is likely to abandon its patient approach to interest rate cuts. UBS anticipates a substantial response from the Fed in the event of a recession, projecting a significant reduction of 275 basis points in interest rates next year.

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