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Projected US Interest Rates in Five Years: Inflation Is Still High, No Cut In 2024?

Last Updated March 21, 2024 11:03 AM
Giuseppe Ciccomascolo
Last Updated March 21, 2024 11:03 AM
Key Takeaways
  • The Federal Reserve has kept record-high rates unchanged.
  • Chair Jerome Powell said the FOMC doesn’t know if a cut will occur in 2024.
  • The Next Federal Open Market Committee meeting will be on June 11 and 12.
  • How do interest rates influence cryptocurrencies?

On Wednesday, May 1, 2024, the Federal Reserve adhered to market expectations by maintaining unchanged  interest rates, while its most recent economic projections  continue to hint at the possibility of three rate cuts later this year.

The central bank kept the federal funds rate range  steady at 5.25% to 5.50%. Since March 2022, the Fed has implemented a total of 525 basis points in rate hikes in an effort to curb inflation. Despite this, it has refrained from raising rates in six out of its last seven meetings, with five consecutive meetings passing without a rate increase.

However, despite chairman Jerome Powell’s words on a cut to occur this year, the market doesn’t look convinced rates will be lowered in 2024.

No Cut Expected Soon

The US central bank adhered to expectations by leaving interest rates unchanged but highlighted a “lack of progress” towards its inflation target. In its statement  following the conclusion of its two-day meeting, the Federal Open Market Committee acknowledged that inflation has moderated over the past year but remains elevated.

“Despite recent developments, there has been a lack of further progress towards the Committee’s two percent inflation objective,” it observed.

The FOMC was reluctant to reduce the target range until it attains “greater confidence that inflation is moving sustainably toward 2%.” While opting to maintain rates, the FOMC did vote to diminish its holdings of Treasury securities and agency debt and agency mortgage-backed securities.

Starting in June, the Committee plans to decelerate the reduction of its securities holdings by lowering the monthly redemption cap on Treasury securities from USD60 billion to USD25 billion.

The Committee will uphold the monthly redemption cap on agency debt and agency mortgage-backed securities at USD35 billion, reinvesting any principal payments exceeding this cap into Treasury securities.

This decision to retain interest rates comes after shifting expectations this year. Initially, a March cut seemed probable, signaling the commencement of an easing cycle by now.

However, hotter-than-anticipated inflation readings and economic data have tempered enthusiasm for rate cuts.

FOMC Won’t Raise Rates

The chair of the US Federal Reserve, Jerome Powell, sought to allay concerns that the next interest rate adjustment would be upward, indicating that current policy should prove sufficiently restrictive to temper inflation, during a press conference  held after the FOMC statement.

However, he tempered expectations for an imminent rate cut, citing the prolonged duration required to gain confidence in the trajectory toward the central bank’s 2% target inflation rate.

“I consider it unlikely that the next policy rate adjustment will involve a hike,” remarked  Jerome Powell during a press conference.

Powell expressed his belief that current policy is “restrictive” and anticipates that, over time, it will become “adequately restrictive.” Nonetheless, he emphasized that this determination would rely on data.

“The data will need to provide compelling evidence that our policy stance isn’t effectively reining in inflation to 2%,” Powell explained. “Based on current observations, that scenario doesn’t seem apparent.”

Nevertheless, Powell cautioned that it’s probable “to require more time for us to gain confidence in our path towards achieving 2% inflation,” effectively quashing any lingering hopes for an imminent rate cut.

“I cannot specify the exact timeframe,” he added.

Powell maintained his expectation for inflation to recede, though he admitted his confidence in this outlook has diminished due to recent data trends.

Official Open To Raise Again

Federal Reserve officials expressed increased concern about the slow progress in combating inflation, as revealed by the minutes  from the latest Federal Open Market Committee (FOMC) meeting on Wednesday, May 22, 2024. Some members even suggested the possibility of raising rates.

“Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate,” the minutes stated.

Officials highlighted a “lack of further progress” toward the central bank’s 2% inflation target, citing recent monthly data that showed “significant increases in components of both goods and services price inflation.”

Specifically, inflation for core services excluding housing increased in the first quarter compared to the fourth quarter of the previous year. Additionally, prices of core goods experienced their first three-month increase in several months, according  to the minutes.

“Members agreed that they did not expect it would be appropriate to reduce the target range until they have gained greater confidence that inflation is moving sustainably toward 2 percent,” the minutes noted.

Officials anticipate that inflation will return to 2% over the medium term. “However, recent data had not increased their confidence in progress toward 2% and, accordingly, suggested that the disinflation process would likely take longer than previously thought,” they said.

While the minutes indicated that some members believed a rate increase should be considered, others were inclined to maintain the current policy stance for a longer period.

“Participants discussed maintaining the current restrictive policy stance for longer should inflation not show signs of moving sustainably toward 2 percent, or reducing policy restraint in the event of an unexpected weakening in labor market conditions.”

Dimon Doesn’t Expect Any Cut In 2024

JPMorgan Chase’s chairman and CEO, Jamie Dimon, believes  that a “hard landing” for the US economy remains a possibility.

When asked by CNBC’s Sri Jegarajah about the likelihood of a hard landing, Dimon responded, “Could we actually see one? Of course, how could anyone who reads history say there’s no chance?”

Dimon made these remarks at the JPMorgan Global China Summit in Shanghai.

He warned that the worst-case scenario for the U.S. economy would be “stagflation,” a situation where inflation continues to rise while growth slows and unemployment remains high.

“I look at the range of outcomes and, again, the worst outcome for all of us is what you call stagflation: higher rates, recession. That means corporate profits will go down, and we’ll get through all of that. I mean, the world has survived that, but I just think the odds are higher than other people think.”

Despite these concerns, Dimon noted that “the consumer is still in good shape,” even if the economy falls into a recession. He highlighted the unemployment rate, which has been below 4% for about two years, and pointed out that wages, home prices, and stock prices have been rising.

Dimon also mentioned  that interest rates could increase “a little bit” more.

“I think inflation is stickier than people think. I think the odds are higher than other people think, mostly because the huge amount of fiscal and monetary stimulus is still in the system and may still be driving some of this liquidity.”

When asked if the world is prepared for higher inflation, Dimon cautioned, “Not really.”

PCE Inflation Topped Estimates

In March, US inflation pressures exceeded expectations, as indicated  by the Federal Reserve’s favored metric. The Bureau of Economic Analysis  reported that the core personal consumption expenditures (PCE) index, excluding food and energy, maintained its annual growth rate of 2.8% in March, unchanged from February but slightly lower than January’s 2.9%.

This latest figure surpassed the consensus forecast of 2.6% cited by FXStreet .

Meanwhile, the annual headline PCE figure, which includes food and energy, accelerated to 2.7% in March from 2.5% in February, surpassing the anticipated 2.6%.

Both core and headline prices saw a 0.3% increase in March compared to February, consistent with the pace seen in the previous month. This monthly outcome aligned with the consensus forecast provided by FXStreet .

Despite these figures surpassing expectations, there were concerns that they could have been even higher. The personal consumption expenditures index grew by 3.4% quarter-on-quarter in the first three months of the year. This marked a significant acceleration from the 1.8% increase observed in the final quarter of the previous year. And it further amplified inflation concerns.

Additionally, the BEA’s report on Thursday revealed that US gross domestic product expanded by 1.6% quarter-on-quarter on an annualized basis in the first quarter of 2024. This growth rate represented a slowdown from the 3.4% expansion recorded in the final quarter of 2023.

Inflation Slows Against Expectations

In April, the US saw a slight easing in its annual inflation rate, as revealed by official numbers . Despite expectations for a higher increase, monthly consumer price growth fell short.

According  to the Bureau of Labor Statistics, April witnessed a cooling year-on-year consumer price inflation rate, settling at 3.4% compared to March’s 3.5%, aligning with forecasts.

Consumer prices ticked up by 0.3% in April on a monthly basis, a slowdown from the 0.4% rise observed in March. This was contrary to the anticipated 0.4% increase, as reported by FXStreet’s consensus .

The BLS highlighted that, in April, the index for shelter and gasoline experienced increases. They collectively contributed to over 70% of the overall monthly rise in the index for all items. The energy index recorded a 1.1% increase during the month, while the food index remained unchanged. Specifically, the food-at-home index decreased by 0.2%, whereas the food-away-from-home index saw a 0.3% rise.

The yearly core inflation rate, excluding food and energy, eased to 3.6% in April from March’s 3.8%, which is in line with expectations.

Dot Plot Expectations

According to the FedWatch Tool  on the CME Group platform, as of Thursday, May 2, 2024, futures tied to the effective federal funds rate (EFFR) signal an 86% probability of the rate remaining within the range of 5.25% to 5.50% at the June meeting.

This implies a mere 14% likelihood of a 25 basis points reduction to the range of 5.00% to 5.25%.

Looking ahead, futures suggest a 30% chance of a 25 basis points cut at the July meeting, and a 44% probability for the same reduction in September.

These insights come after the Federal Reserve opted to maintain interest rates at their current levels during its meeting on Wednesday.

Interest Rates’ Impact on Financial Markets

Projections and decisions regarding interest rates  hold immense sway over the broader economy, affecting various financial markets, including equities, bonds, and commodities.

The Fed’s key tool in this regard is the Federal Funds Rate (FFR). This serves as the base interest rate that influences banks, bond markets, and the overall economy. The Fed makes these rate decisions during its Federal Open Market Committee (FOMC) meetings, held eight times a year. The rate adjustments in 2022 brought about several hikes, with more in store for 2023.

The increase in FFR, in turn, leads to a rise in the prime rate, the fundamental interest rate charged by banks to creditworthy customers. If the FFR goes up, so does the cost of loans and mortgages. This uptick in the cost of servicing loans translates to reduced discretionary income for consumers and businesses. This, in turn, can dampen overall demand and mitigate inflationary pressures.

Fed funds over the years
Federal Reserve’s fund rates decreased during weak economy periods

The implications for stocks are twofold: consumer-dependent sectors like retail and hospitality may face headwinds due to reduced consumer spending. Growth stocks that rely on capital and borrowing could also suffer, as investors shift their focus toward more stable, value-oriented investments in response to market volatility and potential downturns.

Pressure On Bonds

From a mechanical perspective, rising interest rates put downward pressure on bond values. As rates climb, the yield on bonds becomes less attractive compared to the prevailing base rate. This has led to a sell-off in bonds.

This effect is particularly pronounced in the case of long-term bonds, as the discrepancy between their yield and the base rate grows over time.

As a result, fixed-income securities also lose value as the opportunity cost of not owning interest-rate tracking assets increases. Thus, predicting interest rates over the next five years becomes a critical indicator for market trends.

High Rates Critical To Lower Inflation 

The Federal Reserve provided insights on Wednesday, March 6, 2024, into the country’s economic landscape. It revealed a nuanced picture of resilience amid persistent price pressures. According to the Fed’s latest summary of economic conditions, since the beginning of the year, there has been a slight uptick in US economic activity, despite ongoing inflation concerns that prompted the Fed’s decision to raise interest rates.

Outlined in the Fed’s Beige Book , the report indicates that eight out of the twelve Fed districts observed slight to modest growth in economic activity, with the remaining districts reporting either no change or a slight softening. On the employment front, the Fed noted a modest increase in hiring across most regions, accompanied by a slight easing in labor market tightness. This has facilitated both new hires and retention of existing employees for employers.

Despite the overall persistence of price pressures, there are indications of some moderation in inflation across several districts, aligning with recent US inflation data that reflect a gradual slowdown in annual price increases. Nonetheless, inflation remains above the Fed’s long-term target of two percent.

In summary, while the American economy demonstrates resilience in the face of inflationary challenges, the path forward for policymakers and the administration involves navigating the delicate balance between sustaining growth and addressing inflationary pressures to ensure long-term economic stability.

Pressure On Economic Activity

In the first quarter of 2024, the US economy experienced an annualized expansion of 1.6%. This marked a notable slowdown from the previous quarter’s robust growth of 3.4%. And fell below the anticipated 2.5%. This growth rate represents the lowest since the contractions observed in the first half of 2022, according to the advance estimate from the US Bureau of Economic Analysis .

Several factors contributed to this deceleration. Consumer spending, a significant driver of economic activity, moderated to 2.5% from 3.3%, primarily attributable to a decline in goods consumption of 0.4% compared to 3% in the prior month, while spending on services accelerated to 4% from 3.4%.

Non-residential investment also experienced a slowdown, with a growth rate of 2.9% compared to 3.7% in the previous quarter. A decline in structures drove this, although investment in equipment rebounded, and investment in intellectual property products accelerated.

Government spending rose at a much slower pace while exports experienced a significant slowdown, and imports surged. Additionally, private inventories subtracted 0.4 percentage points from growth, an improvement from the previous quarter’s impact (-0.47 percentage points).

However, residential investment saw a remarkable surge, growing at a double-digit pace of 14%, contrasting sharply with the 2.8% growth seen in the previous quarter.

Historical Perspective on Interest Rate Policy

The US has experienced periods of both high and low-interest rate volatility in its history. In the postwar era of the 1950s, the FFR remained below 2%, bolstered by postwar stimulus and income growth. Over the next two decades, the rate fluctuated between 3% and 10% during the 1960s and 1970s, soaring to a record high of 19.1% in 1980 amid rampant inflation.

As the US economy stabilized and inflation was brought under control, the FFR hovered around 5% throughout the 1990s. However, recessions in 2001 and 2008 forced rates down to historically low levels, where they remained until 2016.

The COVID-19 pandemic necessitated another significant rate cut, nearly to zero. In 2022, the Fed increased rates seven times, followed by three hikes in 2023. The central bank brought the rate to its current range between 5.25% and 5.50%, the highest level in 16 years.

Factors Influencing Future Interest Rates

The Fed now faces the challenge of navigating uncertain economic conditions, marked by rising prices and an economic slowdown compounded by supply chain disruptions. Inflation, as well as the potential for a recession, are top concerns.

High Inflation

Inflation has been a focal point for central bank action. In 2022 and 2023, inflation was driven by a mix of demand and supply factors, sometimes interconnected. The Fed’s more hawkish stance appeared to have contributed to a moderation in price increases.

The rhetoric shifted in July. Official data from the US Labor Department revealed that the inflation rate had reached 3.2% year-over-year. To drive this increase were costs in housing, car insurance, and food.

This marked an uptick from June, which had seen the lowest rate in over two years, at 3%. Analysts had anticipated this rise in the headline rate, considering the relatively weak price inflation observed in the previous July.

US inflation rates
US consumer prices inflation peaks and lows

U.S. Dollar Resilience

Despite economic turbulence, the US dollar has remained remarkably resilient. Its status as a safe-haven currency, coupled with increased investor appeal due to the Fed’s hawkish monetary policy, has bolstered its performance. However, as the Fed’s monetary tightening slows and potentially pauses, the strength of the US dollar appears to be waning.

Dollar movements
USD performance

Is Recession Looming?

New data  from the Bureau of Economic Analysis indicates a slightly weaker performance for the US economy in the final quarter of 2023 compared to earlier projections.

The second estimate reveals that real gross domestic product (GDP) increased by 3.2% quarter-on-quarter on an yearly basis, down from the previous quarter’s robust growth of 4.9%.

This figure falls short of the initial estimate of 3.3%, primarily due to a downward revision in private inventory investment, although there were upward revisions in state and local government spending as well as consumer spending.

Year-on-year, GDP growth accelerated to 3.1% in the fourth quarter, surpassing the 2.9% rise in the third quarter.

Personal consumption expenditures, an important measure of inflation, saw an upward revision, increasing by 1.8% on-quarter in the last three months of the year, compared to the initial estimate of 1.7%.

These adjustments shed light on the evolving dynamics of the US economy, highlighting areas of strength and areas for potential improvement as policymakers navigate economic challenges.

Projected Interest Rates in the Next Five Years

Analysts primarily focus on near-term interest rate forecasts, but long-term projections extend over the next several years. These forecasts offer valuable insights into interest rate expectations.

ING’s interest rate predictions indicate 2024 rates starting at 4%, with subsequent cuts to 3.75% in the second quarter. Then, 3.5% in the third, and 3.25% in the final quarter of 2024. In 2025, ING predicts a further decline to 3%. 

The University of Michigan inflation expectations in the US for the five-year outlook were revised slightly higher to 3% in August 2023. This is higher than the preliminary estimate of 2.9%, matching July’s reading.

Rate Cuts On The Horizon?

Economic growth was seen in a range between 1.2% and 1.7% in 2024, and 1.5% and 2% in 2025. Core PCE inflation is expected to fall to between 2.4% to 2.7% in 2024 and 2% to 2.2% in 2025.

Meanwhile, experts surveyed by Trading Economics note a decline in US consumer inflation expectations for the coming year.

Expectations for year-ahead price growth have shifted, with gas decreasing by 0.2% to 4.5%, and food by 0.1% to 5.2%, the lowest since September 2020. Medical care will decrease by 0.9% to 8.4%, the lowest since November 2020, and college education by 0.3% to 8%. Rent will fall by 0.4% to 9%, the lowest since January 2021.

Also, median home price growth expectations decreased to 2.8% in July from 2.9% in June. Meanwhile, consumers also see lower inflation in three years at 2.9% from a previously expected 3% and in five years at 2.9% from 3%.

Economic Activity Improves

Figures from the Bureau of Economic Analysis revealed the US economy experienced even stronger growth than initially projected in the third quarter. The quarter-on-quarter gross domestic product (GDP) expanded by an annualized rate of 5.2% in the three months to September 30. It surpassed the 2.1% growth observed in the second quarter.

An earlier estimate reported a month ago had suggested a 4.9% growth for the same period. The Bureau of Economic Analysis credited the upward revision to nonresidential fixed investment and state/local government spending. To partially balance this was a consumer spending downturn. Crucially, the boost in real GDP was fueled by increased consumer spending, private inventory investment, exports, government spending at various levels, and both residential and non-residential fixed investments.

This represents the most significant quarter-on-quarter GDP growth since the fourth quarter of 2021’s 7% increase. It reflects five consecutive quarters of economic expansion. On a year-on-year basis, U.S. GDP accelerated to 3% in the third quarter. This followed a 2.4% increase in the second quarter. The latest reading marks the fastest annual GDP growth since the 3.6% rise in the first quarter of 2022’s.

Despite the Federal Reserve’s decision to raise rates by 525 basis points since March 2022, the data indicates that the U.S. economy has built significant momentum in the last quarter.

Factory, Labor, And Wages Trends

Manufacturing activity displayed mixed results, though multiple districts showed a brighter outlook for the sector.

The labor market showed signs of easing nationwide. Most districts reported slight to moderate increases in overall employment. This albeit with a reduced sense of urgency among firms in their hiring efforts. However, recruiting and hiring skilled workers remained challenging.

Wage growth remained moderate, with candidates showing less resistance to wage offers. Many firms adjusted their compensation packages to offset higher labor costs. They incorporated measures like remote work options instead of wage increases, reduced sign-on bonuses, or other enhancements.

Price trends indicated modest overall increases, with input costs stabilizing or slowing for manufacturers while continuing to rise for service sector businesses.

Factors such as fuel costs, wages, and insurance contributed to price growth. Sales prices increased at a slower rate than input prices, as businesses grappled with passing on cost pressures due to heightened price sensitivity among consumers, thus impacting profit margins.

In the coming quarters, firms generally anticipate price increases, but at a slower pace compared to previous periods. Several districts reported a reduced number of firms expecting significant price hikes in the foreseeable future.

How Do Interest Rates Affect Crypto?

Bitcoin and other digital assets have demonstrated resilience in a rising interest rate environment. For instance, Bitcoin experienced remarkable growth of 2,000% in 2015 and 2016, during a period marked by rising interest rates.

Nevertheless, some experts argue that persistently high inflation, gas prices, and energy costs resulting from elevated interest rates may dampen risk appetite, potentially posing headwinds for cryptocurrencies.

Central Banks and Connection With Cryptocurrencies

Central banks wield significant influence, directly affecting money circulation and financial market stability. They have the power to modify interest rates, which, in turn, affects the borrowing rates for financial and banking institutions. Recently, central banks in major developed economies, such as the Fed, ECB, and BoE, have increased interest rates in response to widespread inflation.

The increasingly intertwined relationship between cryptocurrencies and these macroeconomic and monetary shifts is noteworthy. In particular, the decisions to raise interest rates, especially by the Fed, have direct repercussions on the cryptocurrency markets.

In simpler terms, the Fed’s more assertive stance has cast a shadow over cryptocurrencies. This has an impact on market sentiment as tighter monetary policies loom.

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