WASHINGTON, DC – The market’s anticipation of interest rate cuts in the United States from March onwards has grown due to a decline in inflation within the country. Consequently, the Federal Reserve has adopted a stimulative stance to ensure a smooth economic transition following the most pronounced monetary tightening cycle in four decades.
Jefferies reported on Friday, “We anticipate that the Fed will reduce the benchmark rate by 25 basis points at the March 20 meeting due to the anticipated decline in inflation in the coming months.” The report underscores the Fed’s awareness of the potential risks associated with a “higher for longer” interest rate scenario in pursuit of a soft landing. The probability of a rate cut in March has surged to 57.9%, up from 21.6% the previous week, according to the Fed Interest Rate Monitor provided by Investing.com.
The initial rate cut is expected to alleviate real interest rates, providing the prospect of a soft landing. The impetus for these rate cuts stems from concerns that the real rate—adjusted for inflation and serving as a more accurate indicator of financing costs for businesses—may be excessively high, posing a potential threat to economic growth beyond initial projections, with a risk of recession.
The Deutsche Bank notes that the full impact of the rate cuts, the swiftest in over forty years, has yet to significantly influence the economy. It highlights discernible signs of economic weakening, citing the October jobs report, which indicated a rise in the unemployment rate to its highest level since January 2022, an increase in credit card delinquency, and a growth in high-yield defaults.
In alignment with other experts, Jefferies also predicts a diminishing strength in consumer spending, a force that has pleasantly surprised economists and sustained economic growth. Jefferies estimates that a shift in the labor market, which has been a support for consumer spending, is expected to occur later in the present year or early 2024. This shift anticipates companies beginning to cut jobs to reduce costs and alleviate margin pressures.
Jefferies notes in a recent statement, “Companies will find it challenging to pass on additional price increases to consumers already burdened, and profit margins will decline as inflation decelerates, potentially leading to layoffs.”
“As we witness the prospective interest rate cuts in the United States, it presents a positive stride towards economic resilience and adaptability. These measures, if implemented judiciously, can act as a catalyst for stability and growth, demonstrating the Federal Reserve’s commitment to navigating the challenges of our dynamic economic landscape.” – said Miguel Risch, Principal Attorney, The Risch Law Firm.