The Fed is determined not to reduce interest rates too soon, experts say — a mistake the central bank has made in the past (2024)

FAQs

Why is the Fed not reducing interest rates? ›

The Federal Reserve's anticipated interest rate cuts appear delayed due to persistent inflation rates above their 2% target, defying the initial expectation of three rate cuts in 2024.

When interest rates increase too quickly, it can cause a chain reaction that affects the domestic economy as well as the global economy. It can create a recession in some cases. If this happens, the government can backtrack the increase, but it can take some time for the economy to recover from the dip.

The Fed typically cuts only when the economy appears to be weakening and needs help. Lower interest rates would reduce borrowing costs for homes, cars and other major purchases and probably fuel higher stock prices, all of which could help accelerate growth.

The Fed also sets the discount rate, the interest rate at which banks can borrow directly from the central bank. If the Fed raises interest rates, it increases the cost of borrowing, making both credit and investment more expensive. This can be done to slow an overheated economy.

After the pandemic, inflation skyrocketed as prices on everything from rent to food increased. In response, the Federal Reserve started increasing interest rates to cool the pace of rising prices, hiking its benchmark rate 11 times between March 2022 and July 2023.

Interest rates have held steady since July 2023.

The federal funds target rate has remained at 5.25% to 5.5% since July 2023. To combat inflation, the rate was raised 11 times between March 2022 and July 2023. Inflation has receded, but the Fed has signaled it wants more positive data before pulling the trigger.

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

They also make the cost of borrowing more expensive. Higher interest rates help to slow down price rises (inflation). That's because they reduce how much is spent across the UK. Experience tells us that when overall spending is lower, prices stop rising so quickly and inflation slows down.

"Rates too high or too low distort financial markets. That ultimately undermines the productive capacity of the economy in the long run and can lead to bubbles, which destabilizes the economy," he said.

When the Fed increases the federal funds rate, it typically pushes interest rates higher overall, which makes it more expensive for businesses and individuals to borrow. The higher rates also promote saving.

Do banks make more money when interest rates rise? ›

A rise in interest rates automatically boosts a bank's earnings. It increases the amount of money that the bank earns by lending out its cash on hand at short-term interest rates.

Raising borrowing costs for consumers theoretically means they have less to spend on other goods and services. Just as importantly, it raises borrowing costs for businesses, reducing demand for investment and lowering profits. This lowers their ability to employ people or give inflation-busting pay rises.

Banks don't need your money

If there is plenty of supply and people are saving a lot, then the banks will not need to pay out as much interest. If people are not saving as much and the banks need more money to lend out, then they will raise savings rates to attract more depositors.

Eventually, higher interest rates tend to slow economic conditions and reduce loan affordability, which lowers demand for loans and leads to tighter underwriting standards that reduce the supply of loans. on bank level data adjusted for mergers over the one-year period.

Many economists still think the Fed will cut rates at some point in 2024—just not at the June 12 meeting. According to FactSet, about 9 in 10 economists are predicting that the Fed will also keep rates steady at its July 31 meeting.

The Fed uses the price of borrowing money to steer the world's largest economy toward the committee's two primary goals: maximum employment and stable prices. Lower rates help boost household balance sheets and incentivize spending, bolstering economic growth and hiring.

Historical data suggests a key factor in bringing down prices is a slowdown in consumer spending. Despite nearly half of Americans reporting they're in a worse financial situation than five years ago, they're still spending.

Since the central bank now projects it will cut interest rates just once in 2024, APRs aren't likely to fall much, Schulz explained. "Those anticipating a dip in new credit card APRs in the near future should probably adjust their expectations," Schulz said.