Will they? Won’t they? Reduce interest rates, that is. 2024 is the year experts (and many Americans) eagerly wait for the Federal Reserve Bank to end its aggressive monetary policy and begin to cut interest rates. However, Fed officials have consistently been adopting a more conservative approach, and with good reason. Cutting back interest rates too early could easily cancel the progress made over the past year, while keeping them high for too long could lead the economy into a recession.
There is no denying that inflation has come a long way from its 9.1% peak in June 2022. However, we still have some way to go before reaching the Fed’s targeted 2% rate. The Fed pays particularly close attention to the so-called core CPI, which removes the prices of food and gas that tend to fluctuate frequently. In December, the core CPI was up 3.9% annually, the lowest annual increase the index has seen since May 2021, and rose 0.3% compared to the previous month.
A lower inflation rate doesn’t mean that prices are going down but simply that they are increasing at a slower pace. While prices for goods have responded to improvements in the supply chain and have started to normalize, service prices are proving to be more stubborn. Shelter costs, in particular, continue to contribute over half of the overall increase in the cost of living and are likely to remain high as the country deals with a chronic housing shortage. In addition, once service prices increase, they tend to stay high: when was the last time your hairdresser informed you that your haircut would be cheaper than your previous visit?
Job Market Still Tight
One of the contributing factors for the stubbornly high service prices is the tight job market, which has been an ongoing concern for the Fed. With workers in high demand, employers have had no choice but to offer higher wages to attract them and, in turn, pass this additional expense on to the customer. Higher wages also contribute to inflation since household revenues tend to increase. In December, the average hourly earnings, an important measure for inflation, rose 0.4% to $34.27 and increased 4.1% annually. The overall unemployment rate was unchanged at 3.7%, but hiring is starting to cool down, although it remains higher than pre-pandemic.
In light of these numbers, many experts agree it is unlikely that the Fed will cut interest rates at its next FOMC meeting, scheduled for the end of the month. However, the most optimistic investors are betting on a first rate cut in March.
We’ll keep you updated on further developments. In the meantime, if you’d like more information about buying/selling or refinancing in today’s market, give us a call or drop us an email.
