Is the Era of High Interest Rates Coming to an End After 4 Years?

Next week, a major news event is expected to shake up the U.S. stock market

Will the era of high interest rates finally come to an end? 

Next week, a major news event is expected to shake up the U.S. stock market: the September U.S. Federal Open Market Committee (FOMC) meeting. The FOMC, scheduled for September 17-18 (local time), is anticipated to decide on lowering the federal funds rate. If this happens, it will mark the end of the high-interest-rate era that has persisted since 2020. Currently, the U.S. federal funds rate stands at 5.25%-5.50%, the highest level in 23 years.

Caution is Still Required

Market attention is focused on how much the FOMC will lower the federal funds rate in September. Typically, rates are adjusted in 0.25% increments, but there were expectations that the FOMC might implement a larger 0.50% cut. However, these expectations have recently diminished. The U.S. has been maintaining high rates to control inflation, and the latest release of the August Core Consumer Price Index (CPI), which excludes volatile items, was higher than expected. This indicates that inflation may not be fully under control yet.

Forecasts for a 1.00% Rate Cut This Year

There are three more FOMC meetings remaining this year, including next week’s session. The prevailing forecast is that the total federal funds rate cut for the year will be 1.00% (46.8%). The next most likely scenario is a 1.50% cut (33.2%). Prior to the August CPI announcement, a 1.50% cut was the more favored prediction, but expectations have adjusted in light of the inflation data. There is now a stronger belief that the Federal Reserve will adopt a more cautious approach to rate cuts.

Impact on Markets

When interest rates are lowered, borrowers see reduced interest burdens, and investors often anticipate increased market activity. However, the domestic market appears somewhat disconnected from this anticipated rate cut. To curb the rising trend in household debt, additional components in loan interest rates have been increased, maintaining high rates. While the "dam" (federal funds rate) might be opening slightly, other mechanisms (loan regulations) are preventing a smooth flow of money.