Finance: 5 Reasons Why Rates Won’t Fall in 2024

For the last two years, the same uncertainty regarding rate developments has persisted. It’s the Fed calling. The probabilities of rate movements change fairly regularly and are always postponed. But what about 2024? Here we take a look at 5 reasons why the Fed could delay cutting rates until 2025.

1/ Pressure from raw materials

One of the factors that has significantly contributed to the slowdown in inflation since mid-June is, in particular, the decline in raw materials. In the graph below we can see a positive correlation between the two:

Since commodities stabilized, inflation has also settled between 3 and 3.5%. Therefore, there is a limit for inflation to fall below 3%, unless there is a significant decline in raw materials. For now, a recovery in the global economy may put pressure on commodity costs (or keep them flat) and make this task more difficult for the Fed. On the other hand, we are in a decade of energy transition. As a result, inflation is likely to remain in the coming years as demand is likely to be substantial.

2/ Fiscal dominance – problematic high rates

Fiscal dominance is a less popular concept. This assumes that monetary policy is dependent on fiscal policy. This means that the greater the debt, the greater the risk of default. Therefore, investors demand a higher return (a high rate) to compensate for the risk. This is why interest rates can remain high. On the other hand, the fact that high rates apply to high debt means more interest that the government has to pay.

And as the demographic ages, taxes are lower to offset the fees that need to be paid, so more bonds need to be issued to pay the interest. All of this remains inflationary because the very fact of keeping rates high increases the cost of the mortgage and thus the cost of renting.

3/ Limited effects of monetary policy

Usually, when the central bank raises rates, it means a slowdown in demand because the cost of borrowing is higher. But unfortunately it has its limits. This is especially true if a large part of the already negotiated loans has a fixed rate. They are not affected by the rate hike. For example, those who locked in fixed rates for several years during the pandemic may have benefited from low rates and are not affected by the effects of increases. They are only affected by new loans, but already in progress. So it doesn’t apply to everyone.

On the other hand, since wage growth remains higher than inflation and the labor market is relatively resilient, it also allows some purchasing power to be preserved.

4/ Economic recovery at the global level

Over the past few months, we have seen the global economy accelerate. If the economy picks up, this is likely to mean a recovery in demand and therefore may put pressure on prices.

When productivity exceeds demand, this risks reducing price pressures.

5/ Increase in the rate of FREIGHT containers

Futures contracts are pricing in an increase in the FRED container rate. The forecast level of growth remains close to the last peak in 2021. If these forecasts are correct, this will not bode well for commodity inflation.

Is the target level of 3% the new 2%?

At this point, as we just saw earlier, there are several reasons why rates may remain at high levels, and likely will continue to do so for years to come. This is also why we read in some media headlines that the level of the inflation target should be changed. That’s a debate to consider, even if the Fed fears it will lose credibility by raising its target rate here for several decades. However, the environment and context have changed significantly and some points may need to be revised, especially this one.

What are the reasons that will convince the Fed to cut rates?

In the past, the Fed has been more reactive than proactive. This is often why interventions often have consequences. In this vein, we can see under what conditions the Fed could cut rates. Obviously, we cannot predict the future, we will base ourselves on the facts.

The Fed’s first term price stability remains. So if it sees a sustained fall in inflation, it will start to cut its key rate. As explained above, keeping commodities in the lateral zone limits the possibility of inflation falling below 3%.

His second term and the most important thing remains the stability of the labor market. If we see an increase in unemployment that becomes worrisome, that should convince the Fed to cut rates. Additionally, if we look at the attached chart, we see that we have no trend acceleration. The 4% level also remains the key unemployment level.

CONCLUSION

Based on current facts, there are several elements that could still delay the rate cut until next year. Therefore, the probabilities gradually decrease. To talk about a rate cut as a permanent decline in the economy that leads to a drop in inflation or an increase in unemployment or a liquidity crisis would therefore require a fundamental change in the current situation.

DISCLAIMER OF LIABILITY

The comments and opinions expressed in this article are solely those of the author and should not be considered investment advice. Before making any investment decision, do your own research.