Will Rate Cuts Come in 2024?

Key Points

Federal Reserve officials have indicated their intention to cut the key interest rate three times in 2024. At present, the benchmark interest rate remains unchanged for a fifth consecutive time. Despite signs of elevated inflation at the beginning of the year, the Fed is maintaining its stance.

The Fed's updated projections suggest stronger economic growth for 2024, with an expansion forecasted at 2.1%, a significant increase from the previous forecast. The Fed's target inflation level remains at 2%, but core inflation, excluding volatile food and energy costs, is projected to be 2.6% by the end of 2024.

Financial markets reacted positively to the Fed's message, with the Dow Jones surging to another all-time high. However, there are differing opinions among Fed officials regarding the necessity of rate cuts, with some suggesting that strong economic indicators might question the need for rate cuts.

The March jobs report and inflation data for March will be closely watched to assess the labor market and inflation trends, which will likely influence the Fed's future decisions on interest rates. While rate cuts are currently expected, additional rate hikes are not entirely off the table, depending on how economic indicators evolve, particularly regarding inflation and employment.

Why Do Rate Cuts Matter?

Interest rate cuts influence the markets in several ways. With regard to the stock market, they reduce borrowing costs for businesses which encourage investment and spending. This boosts profits and drives up stock prices. More importantly though, rate cuts decrease the discount rate used to value future cash flows from investments, making stocks appear more valuable in present terms and further lifting their prices. Overall, rate cuts can have a significant positive impact on the stock market by encouraging investment, boosting economic activity, and increasing the attractiveness of equities relative to other assets.

Rate cuts also typically lead to lower returns on traditional investments like bonds, prompting some investors to seek higher returns in alternative assets such as cryptocurrencies. Additionally, lower rates may encourage riskier investment strategies, contributing to speculative trading and potentially increasing price volatility in the crypto market.