The Federal Reserve has four more chances this calendar year to cut interest rates. As it prepares for its next meeting at the end of July, the Fed is watching two data points: the new inflation data to be released later this week and the mixed jobs report released last week. Since July 2023, the Federal Reserve has kept its benchmark interest rate steady at a 23-year high of 5.25% to 5.5%.
When and how many interest rate cuts continue to be a contentious point of debate. On the heels of the Federal Reserve deciding to leave interest rates unchanged during their June meeting, the June Ag Economists Monthly Monitor asked economists how many rate cuts, if any, we will see this year. Seventy three percent think the Fed will make one interest rate cut this year, 18% think it will be two cuts. That compares to the April survey when 44% of ag economists said they were becoming more pessimistic about interest rate cuts in 2024.
When Will the Fed Cut Rates?
The Fed is not expected to cut rates at its upcoming FOMC meeting July 30 to Aug. 3. But after that, inflation data will be the key barometer. Investors currently see a 77.9% chance of a quarter-point rate cut by the Sept. 17 to 18 Fed meeting. There’s a 97.3% chance of at least one quarter-point cut by the final Fed meeting of the year on Dec. 17 to 18. However, some analysts believe the Fed could initiate its first rate cut in September if economic conditions continue to show signs of cooling. Others expect the first cut to come in the last quarter of 2024, possibly after the U.S. presidential election Nov. 5 (the FOMC meeting is Nov. 6 to 7).
Federal Reserve Chairman Jerome Powell has consistently stated the Fed is “data dependent,” which is particularly the case relative to inflation. That’s why the market will be watching the latest inflation data in the Consumer Price Index (CPI), which will be released on Thursday, along with production inflation numbers out Friday. Powell has emphasized they need “greater confidence” that inflation is sustainably moving toward their 2% target before considering rate cuts.
Many economists and investors are now anticipating two quarter-point rate cuts before the end of 2024. But the Fed’s current “dot” map signals only one cut the remainder of this year. That assumption could of course change in the months ahead.
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Factors influencing the decision, besides inflation, include recent data showing a cooling job market and moderating wage growth. The pace of economic growth and any signs of recession will be closely monitored.
“If there’s an easing in labor market conditions that would encourage them, especially in front of the election, to cut rates, even if the inflation target is not met,” said Vince Malanga, Pro Farmer economic consultant and president of LaSalle Economics, recently on AgriTalk. “If the unemployment situation is softening, especially three or four months before an election, I think you’re going to start to hear some people yelling at the Fed that they’ve overdone it.”
The Labor Department’s June jobs report released Friday showed employers added 206,000 jobs, but concerns remain about the labor market. Despite a slight increase in the unemployment rate of 4.1% due to more people entering the work force, labor force participation among prime-age workers is at its highest point in over 20 years.
However, job growth is slowing, with downward revisions for May and April totaling 111,000 fewer jobs. Nearly three-quarters of June’s new jobs were in government, healthcare and social assistance. While the report doesn’t indicate an imminent recession, it shows an increasing role of government spending in job creation.
Fed Officials Weigh In
Farm Journal spoke to Austan Goolsbee, president and chief executive officer of the Federal Reserve Bank of Chicago, during the Iowa Farm Bureau’s Economic Summit in June. With more work to do in order to get to the Fed’s target of 2%, he says the Fed is also watching the jobs market closely. Up until this point, Goolsbee has been impressed with the resilience of the general economy.
“If you look, for sure internationally, at the U.S. growth, we’ve grown a lot,” Goolsbee says. “We’re actually higher than where we would have been when people were making predictions of where the GDP would be at this point before they had ever heard of COVID. We’re actually above where they were predicting we would be. We’re the only economy where that’s true. I’ve been very impressed with that resilience.”
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Goolsbee says if inflation data continues to come in lower, and the jobs growth posts strong gains, then the Fed could cut rates to more normal levels. But until then, Goolsbee insists the Federal Reserve won’t budge on interest rates.
John Williams, Federal Reserve Bank of New York president, stated that although inflation has recently decreased toward the Fed’s 2% target, reaching the goal will take more time. Currently, inflation is around 2.5%, reflecting significant progress, but sustained 2% inflation is still a way off. Williams reiterated the Fed’s commitment to achieving this target during an event at the Reserve Bank of India in Mumbai.
He emphasized the importance of maintaining “well-anchored” inflation expectations and discussed the challenges of measuring key economic indicators, such as the long-run neutral interest rate, or r-star. He disputed claims that the neutral rate has increased since the pandemic, noting estimates that place it near pre-Covid-19 levels in both the U.S. and Eurozone. In June, officials raised their longer-term rate estimates to 2.8% from 2.6% in March.
