The Federal Reserve has announced its plan to cut interest rates in 2024, but experts are warning of potential chaos in global markets as a result. The decision to lower rates may lead to long-term rates increasing, as the market interprets it as a signal of the Fed pulling back from its fight against inflation. While the battle against inflation has seen some progress, a sustainable drop in inflation is needed for a true victory. Furthermore, the potential weakening of the dollar due to rate cuts could raise inflationary risks and drive up commodity prices, particularly oil. In addition, if the Fed is cutting rates due to faltering growth, it could result in a larger budget deficit, an increase in Treasury supply, and a jump in long-term rates. The withdrawal of the Bank of Japan from negative interest rate policy (NIRP) could also contribute to heightened volatility in the bond market.
On the positive side, moderating inflation can benefit consumers, especially as wage growth remains strong. However, consumers are more affected by the level of inflation rather than its rate of change. On the corporate side, revenue growth is expected to slow as price increases become more challenging, potentially impacting the achievement of double-digit earnings growth estimates for 2024.
While lower interest rates can provide relief for those with debt, there is still a significant amount of corporate and commercial real estate debt that needs to be refinanced in 2024. The interest rates on these new loans are likely to be higher compared to the rates on maturing loans. However, small and medium-sized businesses with floating rate debt may experience some relief as the Fed cuts rates.
The expectations of the market may not align with the planned rate cuts. If the Fed cuts rates fewer times than expected, markets might be disappointed, while a larger number of rate cuts could indicate an economic recession and declining earnings. In the past, a real rate of approximately 250 basis points was considered normal, but the current climate is far from that. The future trajectory of rates will depend on whether the economy continues with decent growth or experiences a slowdown.
Lower rates alone may not be sufficient to address economic challenges, as evidenced by previous instances such as 2001-2002 and 2007-2009. The impact of rate cuts may also be limited, as a 150 basis points cut would still leave the fed funds rate at 4%, far from zero.
While quantitative tightening (QT) is a positive development in the long term, concerns arise as the Federal Reserve’s Reverse Repo Program (RRP) may face liquidity constraints by late Q1 or early Q2.
The stock market, with a price-to-earnings (P/E) multiple of 21x 2024 EPS estimates, is considered highly expensive at current rate levels. However, other segments of the market, such as small and medium-sized stocks, as well as international markets, offer potentially cheaper opportunities.
In relation to international central banks, the European Central Bank (ECB), Bank of England (BoE), and other foreign central banks are also expected to cut rates in 2024, responding to lower inflation and potential economic recessions.
In summary, the Federal Reserve’s decision to cut interest rates in 2024 may result in market chaos. While it may provide relief for some borrowers, the impact on long-term rates, inflation risks, and the overall economy remains uncertain. The market’s expectations and the potential trade-offs associated with the rate cuts add further complexity to the situation. As the year unfolds, the global markets will closely monitor the Fed’s actions and assess the implications for various sectors and asset classes.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Russia News Now. This article is for informational purposes only and should not be considered as investment advice.
