Interest rates remain unchanged, but Federal Reserve signals cuts coming in 2024

William Brangham:

The Federal Reserve opted today to leave interest rates unchanged for a third straight time. But what also made headlines was today's announcement suggesting perhaps as many as three rate cuts next year.

Stephanie Sy has the latest.

Stephanie Sy:

William, Fed Chairman Jerome Powell was more direct than he's been in months in saying rate hikes appear to be over for now and the economy is well-positioned for a so-called soft landing.

Jerome Powell, Federal Reserve Chairman:

We are seeing strong growth that is — that is — appears to be moderating. We're seeing a labor market that is coming back into balance by so many measures, and we're seeing inflation making real progress. These are the things we have been wanting to see.

We can't know. We still have a ways to go. No one is declaring victory. That would be premature.

Stephanie Sy:

The Fed raised interest rates 11 times starting in March of 2022, but only once since this past May.

I'm joined now by economist Julia Coronado. She's the founder of her own firm, MacroPolicy Perspectives, and a former economist for the Fed.

So, Julia, let's get right into it.

Do you think we're done with the series of rate hikes, we're done with them? We have seen those rate hikes for a year-and-a-half.

Julia Coronado, MacroPolicy Perspectives:

Yes, I think we're done with them. And, more importantly, Chair Powell thinks we're done with them.

And he didn't quite promise that. They said they want to hold on to the option to hike if they need to. But he confirmed that most of the policymakers on the committee do not expect any more rate hikes. And the next move is now when and by how much to cut rates.

Stephanie Sy:

Right.

And that's the big headline, I think. I mean, you probably expected that the pause in interest rate hikes would continue. But 17 out of the 19 officials on the committee agreed with a projection that the policy rate will be lower by the end of next year by three-quarters of a percentage point.

What was your reaction to that statement?

Julia Coronado:

Yes, so it was a little bit more aggressive, in terms of the rate cuts, than we were expecting. We thought they might show just two rate cuts. They showed three.

And the market is priced for more rate cuts than that. And Chair Powell did not push back on that. When he was asked, do the markets have it wrong, he basically said, we don't know yet, but we're going to follow the data, and if inflation continues to come in at these lower run rates, then we can go maybe a little bit more.

Stephanie Sy:

But inflation is still running, Julia, at 3 percent.

And when I talk to Americans, they still complain about the cost of dining out, about the cost of rent and insurance. Have we yet to see the full impact of higher borrowing costs and inflation?

Julia Coronado:

That's absolutely right.

And, actually, Chair Powell touched on that. He said, one of the reasons we see this discrepancy between low consumer sentiment numbers and really good readings from a macroeconomist standpoint is that prices are much higher than they used to be, and people don't like that.

What a soft landing would entail or allow is for the job market to keep going OK, people continue to get wage raises, and that will allow their purchasing power to catch up. Things like falling gas prices also help consumer purchasing power. So it will take a little bit of time to catch up, but the economy is actually adding up in the right direction, that people will start to see real wage gains.

They're already seeing real wage gains, where raises are running at a faster pace than inflation. And over time, it's not that prices are going to come back down to pre-pandemic, but your income is going to catch up.

Stephanie Sy:

What about interest rates? Will they come down, and would that be what you expect, to pre-pandemic levels next year?

Julia Coronado:

We will — the Fed is not in a rush. Chair Powell said they're going to proceed carefully. And we don't know how much or how quickly they can cut interest rates.

So they're going to start a sequence of rate cuts and make sure that the economy doesn't reaccelerate or, importantly, inflation reaccelerate. So they're going to be calibrating these moves with the economy, with the incoming data.

Will rates come back all the way down to pre-pandemic? Not sure. That's still a long way from here, but I'm — we're all increasingly confident that rates will be materially lower at the end of next year than they are right now.

Stephanie Sy:

And what will the other impacts be of today's policy statement announcement, Julia?

Julia Coronado:

So, one thing that we have started to see with rates coming off the highs in recent weeks is that applications for mortgages have started to pick up a little bit.

So they really took a hit when mortgage rates hit 8 percent. We have seen them coming down a little bit. So that's going to — we have seen people respond. Consumers should see even lower mortgage rates, given what we heard from Chair Powell today. Also, when you're looking to buy a car, those car loan rates should start coming down as well.

So, consumers should see — consumers looking to make those big-ticket purchases that require borrowing are going to see a little bit of relief on the borrowing costs.

Stephanie Sy:

All right, Julia Coronado with MacroPolicy Perspectives, thank you so much for joining us with your insights.

Julia Coronado:

My pleasure.