Expectations for interest rates in the US are heading for further cuts, with Bank of America expecting an additional 75 basis points cut this year. This forecast comes after the Federal Reserve’s recent decision to cut interest rates significantly, which sparked mixed reactions in the markets. In a research note, Bank of America experts noted that they had revised their forecasts after the sudden cut at the Fed meetings, noting that instead of expecting two 25 basis point cuts, they now believe that a rate cut of 75 basis points is likely in the fourth quarter of this year. This adjustment is a result of growing concern about the US economy and the effects of monetary easing.
In addition, Bank of America expects another cut of 125 basis points in 2025, which will bring the final interest range to 2.75% – 3.00%, indicating a significant shift in monetary policy compared to the current range of 4.75% to 5.00%. On the flip side, Goldman Sachs experts maintain their previous forecast of a 25-basis point rate cut at upcoming meetings, but also noted the possibility of consecutive cuts from November 2024 through June 2025.
Their forecast is that the interest range could reach 3.25% – 3.50% by mid-2025, reflecting divergent views among experts on how to deal with the current economic challenges. Overall, this scenario reflects uncertainty in the US economy, with concerns that expansionary monetary policies may not be enough to support growth amid growing global challenges. Expectations remain open for further changes, and investors cautiously await upcoming economic data that may affect Fed policy and the movement of financial markets in general.
The impact of the US interest rate cut on the inflation rate
A 75-basis point cut in US interest rates is expected to have complex effects on inflation. Lowering interest rates is one of the monetary policy tools used by central banks to stimulate the economy, boosting borrowing capacity and encouraging consumption and investment. When interest rates fall, borrowing costs become lower, making it easier for businesses and consumers to obtain loans. This can lead to increased spending, thus raising demand for Goods and services. Increased demand, in the context of an economy with supply constraints or an imbalance between demand and supply, can lead to higher prices.
If firms increase production to meet rising demand, they may need to hire more workers, which could lead to higher wages. All these factors can contribute to increased inflation. However, there are also head winding factors. In the event of fears of slowing economic growth or a recession, inflation may remain under control despite the rate cut. If consumers are unsure about the economic situation, they may choose to reduce spending even with lower borrowing costs. A lack of demand in some sectors could also limit the impact of interest rate cuts on inflation.
Moreover, the impact of a rate cut on inflation also depends on global conditions. If there is a global economic crisis or a slowdown in the growth of major economies, this could reduce demand for goods and services, putting prices down. In general, the expected impact on inflation from a rate cut depends on the balance of several factors, including the level of economic confidence, domestic and global demand, and supply conditions. Ultimately, monetary policymakers will have to carefully monitor inflation indicators to determine whether they should take additional measures to adjust their monetary policy.
How a rate cut could affect consumers
Rate cuts can significantly affect consumers in multiple ways. When the Federal Reserve or any other central bank cuts interest rates, borrowing costs become lower, encouraging individuals to take out loans to finance their purchases, whether it’s homes, cars, or even education. This can enhance consumers’ ability to achieve their fiscal goals, increasing consumption levels. As interest rates fall, interest rates on credit cards can also fall, making debt repayment easier and less expensive.
This may help consumers better manage their budgets, as they can reduce the amounts paid as interest. Thus, this may increase the purchasing power of individuals, boosting the economy as a whole. On the other hand, consumers may feel negative effects if the rate cut is accompanied by fears of slowing economic growth or recession. In this case, consumer confidence may decline in the future, leading to spending cuts even with lower borrowing costs.
If people feel uncertain about their jobs or finances, they may prefer to save rather than spend. Moreover, the interest cut can also affect savings returns. As interest rates fall, interest earned on bank accounts and certificates of deposit declines, meaning consumers may get lower returns on their savings. This may affect retirement plans or other financial goals that depend on savings returns. In general, a rate cut can have both positive and negative effects on consumers, as it contributes to improving the ability to borrow and spend, but it can also lead to concern about economic conditions and their impact on savings. General economic expectations and sentiment among consumers remain decisive factors in how this cut affects their financial behavior.
