How long can the Fed delay interest rate cuts? And what will happen if they hold rates today?

Overwhelmingly, analysts are expecting the Fed to hold rates steady yet again, neither providing rate cuts or hikes, for May.

But for how long can the Fed keep this up? And what will be the consequences?

Potential consequence 1. Increasingly impatient (and thrifty) consumers

This one is fairly self-explanatory. For months, the public of the US have been promised relief from a risen cost of living in the form of interest rate cuts. And that has not manifested.

Here is what David Morrison, analyst at Trade Nation, says:

As we’ve seen from this year’s CPI readings, and Friday’s Core PCE, inflation is no longer trending down towards the Fed’s 2% target (price stability). So, earlier this year, the Fed was correct to warn the markets not to get carried away with rate cut expectations. Back then, the market was pricing in six or even seven 0.25 basis point cuts, starting in March. Now it’s one 0.25 basis point cut, probably before September. The market’s behavior since the beginning of this month indicates what a big issue this is going forward. As do bond yields, which have shot higher and stayed there.”

Now, there is evidence of a disgruntled consumer base spending less and less. Is there proof of this? Well, there is the currently ongoing earnings season, with its wealth of recent numbers.

On the one hand, numbers have been surprisingly robust for many of the bigger-cap stocks and indices.

At the same time, earnings season for Q1 of 2024 has also been underway, and plenty of companies have shown numbers which tell a story of declining sales due to the stubbornly high inflation. Companies as large as Coca-Cola, Unilever, P&G, McDonald’s and many more have shown the fruits of declining sales in some (if not all) regions as shoppers tighten their belts.

 Potential consequence 2. Stagnation

This consequence follows on from the previous one. In a country with sustained high levels of inflation and a risen cost of living, this happens: people spend less, companies hire less and businesses and individuals tend to default on loans to increasingly pressured financial institutions.

All of this means less economic growth – stagnation. And, with high levels of inflation thrown in? Potentially stagflation as well.

While the economy is currently not showing these signs of strain in some areas, it is in other areas. Morrison sums it up this way:

US GDP growth has slowed significantly since its unexpectedly strong performance last year. The final reading released in October was +4.9%. Now it’s 1.6%. If it continues this trend, then we could see negative numbers in the second half of this year. Stagnation. One way of looking at this is that with GDP rising at a slower rate, the Fed could be more inclined to cut rates. But that’s not in its mandate of working towards maximum employment with price stability.”

What will happen later today?

Well, there will be no rate cut or rate hike today. Of that the markets are already pretty certain – and that has already been priced in.

“So that shouldn’t be an issue,” says Morrison. “But the Fed’s statement could be if it is more hawkish than in March. Also, Jerome Powell’s press conference will be crucial, especially in the way he deals with any questions concerning his colleagues (such as Kashkari, a FOMC-non-voter) who have warned that rate hikes may be needed if inflation fails to turn lower.”

The Federal Reserve will hold a press conference to announce their interest rate decision at 2pm Eastern Time today.

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