Federal Reserve Chairman Jerome Powell made the following remarks at a press conference following the Federal Open Market Committee (FOMC) meeting: [+] The Federal Open Market Committee (FOMC) meeting in Washington, DC, US, Wednesday, May 1, 2024. The Federal Reserve signaled renewed concern about inflation, reaffirming that it needs more evidence that price growth is slowing before lowering interest rates, which are at 20-year highs. Photo by Al Drago/Bloomberg
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The Federal Open Market Committee has not cut interest rates, despite expectations that rates will fall in 2024. The market is currently expecting one or two rate cuts this year.
That's because progress in containing inflation has been slower than expected, and the labor market has remained strong despite relatively subdued interest rates, easing concerns that could prompt rate cuts.
Recent economic data
U.S. short-term interest rates are currently at 5.25% to 5.5%, a peak level that was set when the FOMC last raised interest rates in July 2023. Bond markets had previously expected rate cuts to start sooner, in 2024.
With the job market thriving, policymakers have time to wait for inflation data to show signs of improvement. 2024 hasn't been particularly encouraging so far. After deflation in the second half of 2023, inflation numbers for Q1 2024 showed no progress, but the latest April Consumer Price Index report was somewhat encouraging.
Interest rates forecast for 2024
Following the tone of the FOMC statement, the market lowered its expectations for a rate cut in 2024.
For example, at the Foreign Bankers Association annual meeting in April, Federal Reserve Chairman Jerome Powell stated that the labor market was “very strong.” He also noted that “the first quarter was marked by a lack of progress on inflation.” Regarding future monetary policy, Chairman Powell predicted, “We will need to be patient and let tightening policy take effect.”
When the FOMC's Economic Outlook Overview was last updated in March, most policymakers expected two or three rate cuts in 2024. However, fewer rate cuts are expected at the FOMC's next update, which will be announced at the end of its next meeting on June 12. Markets are expecting rates to remain on hold.
Assuming this is the case, there are four meetings remaining where the FOMC could adjust interest rates in 2024. According to CME's FedWatch tool, the most likely path currently appears to be for the FOMC to cut rates in September and December, although there is also roughly a 10% chance that rates will remain on hold in 2024.
Mortgage interest rates
The 30-year mortgage rate rose to above 7% in April 2024 as the Fed kept rates higher for longer, but that's still down from its recent peak of nearly 8% last October. But mortgage rates have been trending generally upward since the start of 2022 and through most of 2024.
Of course, long-term interest rates are pricing in the FOMC's actions. If the FOMC cuts rates sooner and more aggressively than expected, mortgage costs could fall. In contrast, if rates are cut further, mortgage rates could rise. From a longer-term perspective, where the FOMC sets the neutral rate level is crucial for the 30-year mortgage market.
What to expect
Despite the slower than expected pace, markets still expect one or two rate cuts in 2024, meaning interest rates will remain relatively high come the end of the year.