The Federal Reserve has been hesitant to cut interest rates due to lack of convincing data showing sustainable inflation reaching 2%. Fed Chair Powell stated that it will likely take longer than expected to achieve this target, causing US stocks to initially drop and Treasury yields to rise. The prospect of rate cuts seems to be slipping away, with potential negative impacts on the US economy if high interest rates persist.
Investors had initially anticipated three rate cuts at the end of last year, believing the first cut would come in March. Lower rates are preferred by investors as they reduce borrowing costs and can boost profits. However, progress on inflation stalled leading into last month’s policy meeting, and investors pushed back their timeline for rate cuts to June. Despite recent stock market declines, prices still reflect an expectation of upcoming rate cuts, though if they fail to materialize, market prices could decline further.
The longer the Federal Reserve keeps interest rates high, the more potential pain could be inflicted on households and businesses. Elevated interest rates tend to cause people to save rather than invest or spend, slowing the economy. If the Fed does not cut rates this year, the risk of this happening will be elevated. Already, higher interest rates have fueled increased US Treasury yields and higher mortgage rates, potentially impacting consumer spending, business investment, and the housing market.
While some experts warn that maintaining high interest rates could have negative consequences on the economy, not everyone believes that cutting rates is necessary to avoid a recession. Goldman Sachs’ chief US economist, David Mericle, thinks the economy is strong enough to withstand the lack of rate cuts. However, it is important to consider the potential effects of prolonged high interest rates on borrowing costs, consumer spending, and business investments.
Market declines can lead to firms delaying investments or cutting back on expenses, as seen with Tesla’s recent workforce reduction amid falling share prices. As stock market declines make households feel less wealthy, they may also cut back on spending. Ultimately, the Fed’s decision on interest rates will have a significant impact on the economy and financial markets, with increased borrowing costs potentially leading to negative consequences on various sectors. Experts are divided on whether rate cuts are necessary to support economic growth or whether the economy can sustain itself despite elevated interest rates.
