Much Interest in Rates

So, when will it happen? 

No, we are not talking about a Travis Kelce-Taylor Swift engagement (although that is something you can place a bet on ... in Canada). Instead, it’s interest rates that are piquing our interest. Everyone is anticipating a cut—or cuts—in 2024, but the potential timing is all the talk. 

The CME FedWatch Tool—the closest thing we have to Vegas odds—says an easing of rates is most likely to start in May. But the decision is anything but cut-and-dried, largely because the economy has been performing so well—even with rates at their highest in decades. 

Despite expectations of a downturn, the U.S. economy continues to defy forecasts. It grew 3.3% in the fourth quarter of 2023, exceeding the 1.5% rate economists predicted. Consumer spending was also up for the quarter, by 2.5%, and unemployment sits at historically low levels. 

All of this begs the question: Could messing with interest rates potentially spoil a good thing? All eyes are on the new-look Fed, who concluded their first meeting of 2024 yesterday. Here’s a bit of what they are weighing: 

Keeping it real. While the “nominal” rate gets much of the attention, “real” interest rates—the nominal rate minus the rate of inflation—will factor heavily in the Fed’s decision. Real interest rates help consumers understand how much they’re really paying to borrow money. While interest rates have stayed put at around 5.3% since July, inflation has decreased steadily, meaning real rates are trending higher, potentially restricting economic activity.  

Sending signals. No one expected a cut this week. The economy is growing, inflation is moving in the desired direction, and the Fed wants to be sure that’s sustainable. Instead, observers were watching for a noticeable move away from the Fed’s “tightening bias,” signaling openness to potential rate cuts, especially in light of rising real interest rates (and they got it). 

There are different schools of thought on whether a cut in March or May (or even later) makes the most sense. But there are also many geopolitical wild cards that could potentially change the math very quickly: tensions in the Red Sea, wars in Gaza and Ukraine, a slowing Chinese economy, to name a few. And then, of course, there’s the U.S. presidential election.