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The Federal Reserve’s interest rate hike cycle has been a major concern for Wall Street, as it has battered markets and tested investor morale. While a pause in interest rate hikes seems likely, experts suggest that cuts may be farther off than expected. In this article, we will explore why the Fed probably won’t cut rates anytime soon and the potential consequences of cutting rates prematurely.
Why the Fed Is Unlikely to Cut Rates Anytime Soon
According to experts, the Federal Reserve is unlikely to cut rates anytime soon as long as the economy remains strong. They suggest that a rate-hike pause could be better for stocks than a cut. Although prices are stabilizing, inflation is still above the Federal Reserve’s two percent target, while American unemployment is at a record low. The US housing market is cooling down, but low inventory and persistent demand are pushing home prices higher in some parts of the country. These factors indicate that the Fed has no strong reason to pivot to lowering rates yet.
The Fed Cuts Rates Only in a Crisis
Kara Murphy, chief investment officer at Kestra Investment Management, stated that the Fed rarely cuts rates without some crisis in between. The last time the Fed slashed rates was in March 2020, after an emergency meeting. During this time, the Covid-19 pandemic caused US markets to tumble into the first bear market in 11 years. This resulted in some panic, as many feared that the global economy would go into a deep recession.
The recent collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank have raised concerns about potential turmoil in the banking sector and credit standards tightening. However, these disturbances have been limited to regional banks, and financial and economic leaders have assured that the banking sector remains stable.
According to Liz Ann Sonders, chief investment strategist at Charles Schwab, a significant downturn in the banking sector, labor market, or the economy would need to happen for the central bank to consider lowering rates in July. Sonders also added that the Fed would lose its credibility if it decided to cut rates without any valid reason after hiking them previously.
Cutting Rates Prematurely Could Have Grave Consequences
While the Fed may bring down rates soon, it’s not guaranteed to benefit the stock market. Credit Suisse’s report suggests that following a pivot to rate cuts, stocks tend to perform tepidly compared to a pause. The S&P 500 has historically climbed by 16.9 percent on average in the 12 months after the last hike of a Fed rate cycle, but it has fallen by one percent in the 12 months following the first rate cut. The analysts warn that the upside would be limited if the Fed were to ease rates in July. Premature rate cuts could have severe economic consequences, as seen between 1972 and 1974 when inflation rose sharply after the Fed cut rates.
The Fed is unlikely to be in a hurry to cut rates this time, according to Marco Pirondini, US head of equities at Amundi. However, a Fed rate cut this year is not completely out of the cards, says Nicole Webb, senior vice president at Wealth Enhancement Group. The Fed may want to lower rates back down, but it’s unlikely to do it at the historical pace it’s raised them over the past year. Webb suggests that the Fed can slowly pace the rate down to 2.5 percent without causing inflation to spike.
Final Thoughts
While a pause in interest rate hikes seems likely, experts suggest that cuts may be farther off than expected. Inflation remains sticky, and the economy has remained strong, making it unlikely that the Fed will pivot to lowering rates anytime soon. Cutting rates prematurely could also have severe economic consequences, as seen in the past, and could damage the Fed’s credibility. The Fed is unlikely to be in a hurry to cut rates this time, and while a rate cut this year is not completely out of the cards, it’s unlikely to happen at the historical pace the Fed raised them over the past year.
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