Could the Fed decide not to cut interest rates this year?

Possibility of rates remaining unchanged can’t be ruled out, says VP

Could the Fed decide not to cut interest rates this year?

Inflation ticked unexpectedly upwards last week in unwelcome news for those holding out hope on an imminent Federal Reserve rate cut – and there’s no guarantee that the central bank will lower rates at all in 2024 if it remains high, according to a prominent mortgage industry executive.

Melissa Cohn (pictured), regional vice president at William Raveis Mortgage, told Mortgage Professional America before the release of the latest inflation figures that the likelihood of a rate cut at the Fed’s next announcement was already diminishing rapidly.

“I think that unless we see inflation data trending down more robustly, the odds of a June rate cut are probably falling off the table pretty quickly,” she said. “But then, hopefully by July, we’ll have enough evidence of either inflation waning or the economy slowing down in order for the Fed to have a rate cut.”

It’s “possible” the Fed could keep rates at their current level throughout the year with no cuts, Cohn said, if the economy remains strong and continues operating at an advanced clip.

“If you think about it, you go back to the beginning of 2023, the expectation was the Fed was going to start cutting rates by the end of 2023,” she said.

“The Fed made a pivot towards a more dovish tone, that the next move would potentially be a rate cut, in December – but the economy continues to defy in this high-rate environment that we’re in, and data keeps playing to the engine that just doesn’t want to give up.”

The so-called core consumer price index, which excludes the cost of food and energy, increased by 0.4% last month over February and jumped 3.8% on a year-over-year basis.

ING chief international economist James Knightley said the reading showed inflation remained “too hot for comfort” in the US – and that a rate cut was unlikely to arrive before September as a result.

“A June rate cut is not happening, barring a rapid reversal of fortunes for the economy,” Knightley wrote in a note. “July is also doubtful, meaning September is the more probable start point of any easing, which would limit the Fed to a maximum of just three rate cuts this year.”

Could the upcoming election influence the Fed’s approach on rates?

Another conundrum for the Fed: the fact that this is an election year, an issue that can complicate its ability to lower or raise rates prior to November.

“We have to add that on top of it all,” Cohn said. “Will the Fed be able to cut rates in September right before the election? Maybe. I mean, they talked about it.

“But we’ve heard from more Fed members with the expectation that there would be a rate cut but perhaps not until the fourth quarter, and that would mean probably not until November or December.”

JP Morgan global market strategist Meera Pandit noted recently that the Fed doesn’t necessarily sit on the sidelines during election years, having either hiked or cut rates in every election year since 1980 with the exception of 2012.

In that year, “rates were at zero and the economy was still healing from the financial crisis,” Pandit said. “Otherwise, the Fed cut rates in five election years and hiked in five election years.”

For Pandit, one theme emerged clearly from studying the Fed’s behavior in election years: “Whether the Fed was adjusting based on dynamic economic conditions, responding to severe recessions, or following a path already forged, it continued to pursue its dual mandate irrespective of elections.”

Homebuyers should prepare for prospect of higher rates for longer

The growing likelihood that rates will remain unchanged for the foreseeable future is something that prospective homebuyers should factor into their purchasing plans, Cohn said, with little prospect of borrowing costs coming down in the short term.

“I think that anyone buying today with the expectation that they’re going to be able to refinance this summer or early fall are going to have to readjust those expectations and assume that 2025 is really going to be the year, hopefully, when we see interest rate declines,” she said.

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