Will the Fed still cut interest rates?

STRONG first-quarter economic data for the US manufacturing, housing and employment sectors, combined with inflation between 3.5 and 4 per cent since mid-2023, have caused markets to unwind expectations of six rates cuts for 2024. More recently some have begun to question whether the US Federal Reserve may forgo rate cuts entirely this year.

Looking back to the early 1950s, the US central bank has required two of three catalysts to be in place before it has historically begun a rate-cutting cycle. Some combination of the US industrial sector, measured by the Institute of Supply Management’s Purchasing Manager’s Index (PMI), in contraction (that is, less than 50); unemployment rising by more than 50 basis points over the previous year (the Sahm rule); and/or disinflation risks morphing into deflation with headline CPI falling below 3 per cent has preceded rate-cutting cycles in the past.

Only a systemic threat to the financial system – more common since 1995 – has overridden these catalysts. But even then, often at least one of the three triggers was present amidst a systemic threat to begin a Fed rate-cutting cycle.