Live Updates: Federal Reserve Meets as Investors Focus on Rate Cuts to Come
The Federal Reserve is expected to leave interest rates unchanged but could set up for a cut later this year.
8
%
Federal funds
target rate
6
No change
expected
4
RECESSIONS
2
0
2000
’05
’10
’15
’20
’24
20
%
18
16
Federal funds
target rate
14
12
10
RECESSIONS
8
6
No change
expected
4
2
0
1970
’75
’80
’85
’90
’95
2000
’05
’10
’15
’20
’24
20
%
18
Federal funds
target rate
16
14
12
RECESSIONS
10
8
6
No change
expected
4
2
0
1970
’75
’80
’85
’90
’95
2000
’05
’10
’15
’20
’24
20
%
18
Federal funds
target rate
16
14
12
10
RECESSIONS
8
6
No change
expected
4
2
0
1970
’75
’80
’85
’90
’95
2000
’05
’10
’15
’20
’24
Federal Reserve officials are widely expected to leave their key interest rate unchanged on Wednesday, keeping it at the two-decade high of 5.3 percent for a 12th straight month in a bid to slow economic growth and crush inflation.
But investors will be most focused on what comes next for borrowing costs. Economists and traders widely expect Fed officials to cut their policy rate at their next meeting, in September. Wall Street will closely watch for any hints about the future in both the Fed’s statement at 2 p.m. and a subsequent news conference at 2:30 p.m. with Jerome H. Powell, the chair of the central bank.
Here’s what to look out for.
Watch the Fed’s statement for changes.
The Fed’s statement currently says that Fed policymakers expect to hold rates steady until they have “gained greater confidence that inflation is moving sustainably” down.
Michael Feroli, chief U.S. economist at J.P. Morgan, wrote in his preview note that the statement could be headed for a small but meaningful tweak: Officials could adjust “greater confidence” to read “further confidence,” or some similar rewording. That would signal that policymakers were becoming more comfortable with the inflation backdrop.
The Fed chair could give hints about the outlook.
Many economists predict that Mr. Powell is likely to avoid committing the Fed to anything concrete, even though market pricing has coalesced around a rate move in September.
“The market might be disappointed if it’s expecting that Powell will commit to a cut in September,” said Oscar Munoz, chief U.S. macro strategist at TD Securities. “They’re almost there — but they want to see a few more data releases.”
Rate-cut timing hinges on incoming data.
When and how much the Fed cuts this year are likely to hinge on two sets of incoming data: what happens next with inflation and what happens next with the job market.
When it comes to inflation, some economists think that it would take only a little bit more evidence of progress on the two main measures — the Consumer Price Index and Personal Consumption Expenditures index — to push the Fed toward a rate move.
But Fed officials have been clear that they are also paying close attention to what is happening in the job market. If conditions sour, that may add to their urgency in cutting rates. Policymakers will receive two fresh jobs reports before their September meeting, with the July numbers coming on Friday. “They don’t want to take the strength of the labor market for granted,” said Karen Dynan, a Harvard professor and former Treasury chief economist during the Obama administration.
Another big question: How fast will rates come down?
Both the labor market and inflation data are likely to inform how fast rates fall over the next few years. While the first cut is in focus at the moment, investors are also beginning to wonder what will come after it.
As of their June economic projections, Fed forecasts implied that central bankers could cut roughly every other meeting once they got started. That would lower rates to 4.1 percent by the end of next year and 3.1 percent by the end of 2026.
Mr. Powell could face questions about how the Fed is thinking about pacing after an initial move at his news conference this week. So far, officials have been more focused on explaining what it would take for them to begin lowering borrowing costs in the first place.
Stocks rose as Wall Street awaited the Fed’s decision. The S&P 500 was up 1.6 percent while the Nasdaq gained 2.5 percent, led by chipmaker Advanced Micro Devices after a strong earnings report on Tuesday.
Continuing a drumbeat that has grown in recent months, a trio of Democratic senators wrote to Powell this week demanding the Fed begin to cut rates — and effectively accusing Fed officials of playing politics if they decline to.
“A rate cut at your meeting this week would represent the polar opposite of a ‘political’ intervention,” Senators Elizabeth Warren of Massachusetts, Sheldon Whitehouse of Rhode Island and John Hickenlooper of Colorado wrote in the letter.
“Indeed,” they continued, “given that the data appears to clearly justify cutting rates, the failure to do so would indicate that the Fed is giving in to bullying, and is putting political considerations ahead of its dual mandate to ‘promote maximum employment and stable prices.’”
Advertisement
SKIP ADVERTISEMENT
S&P 500
July was an unusually bumpy month for Wall Street, as investors reconsidered their appetite for big technology stocks and piled into shares of smaller companies.
Small companies are particularly sensitive to borrowing costs and the outlook for the domestic economy, so falling borrowing costs bolster their prospects. Futures markets are now pricing in a rate cut of a quarter of a percentage point in September, according to CME FedWatch, and as Wall Street’s confidence in that cut has grown, shares of the these businesses have rallied.
Also driving this shift is a rethink among investors about the potential for artificial intelligence to continue to drive gains at big companies like Microsoft, Nvidia and Alphabet, after shares of those businesses surged in the past year.
By early Wednesday, the Russell 2000 index of small capitalization stocks had rallied 9.7 percent for the month — on track for its best monthly performance of the year — while the technology heavy Nasdaq Composite was down more than 1 percent.
This broadening market rally is welcome news to those who had worried that big technology companies had become too dominant in the stock market. Whether it continues could depend on what signals the Fed sends later on Wednesday.
Here’s where markets stand before the statement.
The S&P 500 is up 1.6 percent as of noon.
Yields on 10-year government bonds were little changed, at 4.1 percent.
Yields on two-year government notes, which are particularly sensitive to changing expectations for short-term interest rates, also held steady at 4.3 percent.
We’ll be live today for the Fed’s July meeting, which kicks off with a rate decision released at 2 p.m. and then continues with a news conference at 2:30 p.m. with Jerome Powell, the Fed chair.
Hardly anyone expects a rate cut today, so the real point of focus is what the Fed will say about the future. Will they hint that a rate cut is coming in September? How fast will rate cuts move once they get started?
Interest rates influence our financial lives in numerous ways: Savers are now benefiting from higher-yielding bank accounts, while people carrying heavy revolving debt loads continue to be squeezed.
It’s been a year since interest rates reached a two-decade high, but they may soon begin to reverse course. The Federal Reserve is expected to hold its benchmark interest rate steady on Wednesday, while signaling that a cut is possible when policy-setting officials meet again in September.
The Fed has raised its key rate to 5.33 percent from near zero in a series of increases starting March 2022. The goal was to rein in inflation, which has since cooled considerably. Now, Fed officials want to be sure prices remain under control while considering its second objective, which is to keep a strong job market. If interest rates are elevated for too long, they risk weakening the employment picture.
The central bank uses interest rates to influence the broader economy. When policymakers raise rates, money becomes more expensive to borrow, which slows consumer demand. Conversely, lower rates may spur more spending, igniting economic growth.
But the direction of rates also has implications on consumers’ wallets. Here’s how different rates are affected by the Fed’s decisions — and where they stand.
Credit Cards
Credit card rates are closely linked to the central bank’s actions, which means that consumers with revolving debt have seen those rates rise quickly over the past couple of years. Increases usually occur within one or two billing cycles, but don’t expect them to fall quite as rapidly even when rates eventually decline.
That means that consumers should prioritize repayment of higher-cost debt and take advantage of zero-percent and low-rate balance transfer offers when they can.
The average rate on credit cards with assessed interest was 22.76 percent at the end of June, according to the Fed, up slightly from 22.16 percent a year earlier and 16.17 percent at the end of March 2022, when the central bank began its series of rate increases.
Car Loans
Auto loan rates remain elevated, which has squeezed affordability and dampened demand among would-be car buyers. But automakers and dealerships have begun offering more discounts and other incentives, which has lured some buyers back to the market.
“Manufacturers are not offering many low-rate loans, but lucky consumers can find some financing deals ahead of expected market-rate declines later this year,” Jonathan Smoke, chief economist at the market research firm Cox Automotive, said in a recent report.
The average rate on new-car loans was 7.3 percent in June, according to Edmunds, a car shopping website, up from 7.2 percent in the same month in 2023 and 5.2 percent in 2022. Used-car rates were even higher: The average loan carried an 11.5 percent rate in June, up from 11 percent in June 2023 and 8.3 percent in 2022.
Car loans tend to track with the yield on the five-year Treasury note, which is influenced by the Fed’s key rate — but that’s not the only factor that determines how much consumers will pay. A borrower’s credit history, the type of vehicle, the loan term and the down payment are all baked into that rate calculation.
Mortgages
Mortgage rates have retreated a bit from their most recent peak. After reaching as high as 7.22 percent in early May, the average rate on a 30-year fixed-rate mortgage was 6.78 percent as of July 25, according to the mortgage-financing giant Freddie Mac. That’s up from 6.81 percent in the same week last year.
“Despite these lower rates, buyers continue to pause, as reflected in tumbling new and existing home sales data,” said Sam Khater, chief economist at Freddie Mac.
It’s been a volatile ride. Rates climbed as high as 7.79 percent in late October before dropping about a point lower and stabilizing, at least temporarily.
Rates on 30-year fixed-rate mortgages don’t move in tandem with the Fed’s benchmark, but instead generally track with the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations about inflation, the Fed’s actions and how investors react.
Other home loans are more closely tethered to the central bank’s decisions. Home-equity lines of credit and adjustable-rate mortgages — which each carry variable interest rates — generally rise within two billing cycles after a change in the Fed’s rates. The average rate on a home-equity loan was 8.59 percent as of July 24, according to Bankrate, a consumer financial website, while the average home-equity line of credit was 9.17 percent.
Student Loans
Borrowers who already hold federal student loans are not affected by the Fed’s actions because such debt carries a fixed rate set by the government. But rates on new federal student loans recently rose to their highest level in a decade: Borrowers with federal undergraduate loans disbursed after July 1 (but before July 1, 2025) will pay 6.53 percent, up from 5.5 percent for loans disbursed in the same period a year before.
Rates on loans for graduate and professional students increased to 8.08 percent. And rates on PLUS loans — financing available to graduate students and parents of undergraduate students — rose to 9.08 percent.
The rates are priced each July using a formula that is based on the 10-year Treasury bond auction in May.
Borrowers of private student loans have already seen rates climb because of previous rate increases: Both fixed- and variable-rate loans are linked to benchmarks that track the federal funds rate, the Fed’s benchmark rate.
Savings Vehicles
Individuals have been earning more on their savings, but if the Fed suggests that rate cuts are on the way, that could all begin to change. “Banks have a history of being proactive in cutting deposit rates when the Fed signals a forthcoming rate cut,” said Ken Tumin, founder of financial site DepositAccounts.com, part of the online loan marketplace LendingTree.
Savers usually benefit when the federal funds rate is higher because many banks pay more on their savings accounts, particularly if they want to attract more deposits.
Online institutions tend to price their savings accounts much more competitively than their brick-and-mortar counterparts, though some have already begun to dial down their rates.
The rates on certificates of deposit, which track similarly dated Treasury securities, have already dropped multiple times this year. Now may be the time to lock in the most attractive yields before they fall further.
The average one-year C.D. at online banks was 4.99 percent as of July 8, down from its peak yield of 5.35 percent in January, but up from 4.88 percent a year earlier, according to DepositAccounts.com. But you can still find one-year C.D.s with yields of more than 5.25 percent.
Most online banks have held their savings account rates relatively steady: The average yield on an online savings account was 4.40 percent as of July 8, down only slightly from a peak of 4.49 percent in January, according to DepositAccounts.com, and up from 4.08 percent a year ago.
Yields on money-market funds offered by brokerage firms are even higher. The yield on the Crane 100 Money Fund Index, which tracks the largest money-market funds, was 5.13 percent on July 29.
Advertisement
SKIP ADVERTISEMENTFederal Reserve officials are widely expected to embark upon a rate-cutting campaign in the coming months, bringing borrowing costs down from elevated levels as cooling inflation allows policymakers to stop squeezing the economy so much.
But they will most likely do that against a fraught political backdrop.
The Fed is expected to start cutting rates in mid-September, not long before voters in the United States head to the polls to elect a new president. Central bankers will meet about rates again on Nov. 6-7, just days after the election.
If they lower interest rates before the vote, there is a risk that Republicans will cast it as a politicized move meant to help Democrats: Lower borrowing costs can bolster the economy and markets. Former President Donald J. Trump, the Republican nominee, has already said the Fed should not be cutting rates leading up to November.
But central bankers have been clear that they plan to set interest rates with an eye on inflation and job market data, while trying to ignore the election entirely. Fed officials have been keeping interest rates high to bring inflation under control, and now that price increases have come down notably and the job market is cooling, they are slowly pivoting toward rate cuts to make sure they don’t slow the economy too much and cause a recession.
“Their actions are going to be guided by the right thing to do from the perspective of monetary policy,” said Karen Dynan, a professor at Harvard who was the chief economist at the Treasury Department during the Obama administration.
Incumbent politicians would generally prefer to have low interest rates, which can help the economy grow more strongly. President Biden has mostly avoided commenting on monetary policy out of respect for the Fed’s independence from the White House, and Jerome H. Powell, the Fed chair, recently said he had not met with the president in the past two years.
But other prominent Democrats have been publicly urging Fed officials to cut rates, arguing that the data justify an immediate move even if Republicans claim that a rate reduction would be political.
“A rate cut at your meeting this week would represent the polar opposite of a ‘political’ intervention,” Senators Elizabeth Warren of Massachusetts, John Hickenlooper of Colorado and Sheldon Whitehouse of Rhode Island wrote in a letter to Mr. Powell this week. All three are Democrats.
While Mr. Trump called for lower rates regularly when he was president, he has repeatedly suggested that any move to cut them before the election would be a politicized bid to help Democrats. In a recent interview with Bloomberg Businessweek, he called a rate reduction before the Nov. 5 election “something that they know they shouldn’t be doing.”
If Mr. Trump were to win, one big question is whether he would approach the Fed the way he did during his first term as president — regularly and loudly criticizing the central bank — or whether he would go further, potentially trying to fire Mr. Powell before his term expires. Whether a Fed chair can actually be fired is unclear.
“I would let him serve it out, especially if I thought he was doing the right thing,” Mr. Trump said in his Businessweek interview. While that suggests the former president isn’t planning to fire Mr. Powell, Mr. Trump’s wording hints that he thinks dismissing the Fed leader is a choice.
If Democrats win the White House in November, the Fed could see more continuity. Vice President Kamala Harris, the presumptive Democratic nominee, has said relatively little about inflation and monetary policy. But she was on board as vice president when the Biden administration crafted its economic policy stance.
“We’re likely to see a similar approach,” said Bharat Ramamurti, who served as the deputy director of the National Economic Council for manufacturing, innovation and domestic competitiveness from 2021 to 2023 during the Biden administration. “That would be my guess.”
Advertisement
SKIP ADVERTISEMENT
Posts
No comments:
Post a Comment