How could the economy be affected if the Fed doesn’t cut interest rates in 2024?
After the hotter-than-expected Consumer Price Index report for March, the Federal Reserve has indicated that it will not be slashing interest rates soon.
Federal Reserve Chair Jerome Powell says that it will take more time for the central bank to gain confidence that inflation will slow down to its 2% target. He says this means policies will need to be restrictive for a longer period of time, indicating that interest rates will not be cut anytime soon.
The Fed is expected to leave rates unchanged at their upcoming meeting, dashing investors’ hopes of several cuts taking place this year.
How could the economy be affected if the Fed doesn’t cut interest rates in 2024?
Last year, indications by the central bank that there would be multiple rate cuts in 2024 buoyed the stock market to record highs. Investors were anticipating that cutting interest rates would result in higher profits for companies, and more money for people to put into the market.
READ ALSO: Continued inflation could mean a higher COLA for Social Security benefits in 2025
This was supposed to be the year that US inflation rode the last mile down to 2%, letting the Federal Reserve steadily reduce interest rates from a two-decade high. Now those expectations have been dashed. https://t.co/zZX446sagX
— Bloomberg (@business) April 17, 2024
READ ALSO: New housing construction fell in March
Effect on the stock market
After Powell signaled that interest rates were not going down very soon, the stock market initially dipped while Treasury yields hit their highest level this year.
If the cost of borrowing remains high, market prices are expected to slide. Speaking to CNN, finance professor Itay Goldstein says a sluggish stock market will affect the overall economy because a downturning market may end up with businesses putting off investments or employing cost-cutting measures.
Higher chances of recession
Last month, consumers in the US continued shopping despite elevated prices. However, if interest rates do not go down, shoppers might begin to hold on to their money instead of doing any retail therapy or investing it. Slowed-down spending also results in a slower economy.
According to Goldstein, the chances of this taking place will increase if the Federal Reserve refrains from slashing interest rates in 2024.
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