What If the Fed Doesn’t Cut Rates at All This Year?

Waiting Game

Interest rate cuts have been on investors’ minds for a while now. Certainly since last year. The pace of price increases has come down, and for a while there, market expectations were really set on getting the first rate cuts sooner rather than later. But things have changed again.

In its December projections, the Fed projected multiple cuts in 2024. However, recent economic reports have muddled the picture: Inflation ticked back up in January for example, and economic growth remains strong, suggesting no need for extra help from lower rates. So then, what’s next?

Data-Driven Delay

The U.S. economy has shown its strength last year, growing more than expected in the final months of 2023. The labor market also continues to chug along, with a historically low unemployment rate. This is all cause for celebration, generally speaking. But for those anxiously waiting for interest rate cuts, it’s tricky. Here’s why: The lowering of interest rates is intended to spur economic activity. But right now, that doesn’t really seem necessary, and that’s giving the Fed quite a bit of breathing room.

Making matters worse, the January consumer price inflation report was surprisingly “hot”. On the month, prices rose more than expected, and that could suggest the Fed’s work of fighting inflation through high rates isn’t quite done yet.

The majority of market participants still anticipate rate cuts this year. But what might a scenario look like where they stay higher for longer?

Market Mechanics

If rates stay higher for longer, there are potential implications for the market.

For bonds, for example, there’s a strong correlation between rate expectations and long-term Treasury yields, according to Rosenberg Research. In other words, if expectations for future interest rates are high, this could push bond yields up.

•   Elsewhere, some $1 trillion in real estate loans will mature by 2026. Much of this debt will likely have to be refinanced. Elevated interest rates will make this more expensive for commercial landlords and could shake up the industry. Investors will keep their eyes on the Fed — and economic reports — until they can be sure that the central bank is ready to change its policy.

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