Kiplinger Interest Rates Outlook: First Cut in Short-Term Rates Likely in June

Waiting until the June 12 Federal Reserve policy meeting would let the Fed see three more months of inflation data.

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Federal Reserve Chair Jerome Powell left short-term rates unchanged at the March 20 Fed policy meeting, but financial markets reacted positively because board members are still expecting to cut rates three times this year.
The current expectation is that the first Fed cut will take place at the June 12 meeting. The news is that for the first time, Powell said that the Fed would start slowing the rate of reduction in its Treasury securities portfolio “soon.” This would be seen by markets as an early easing action. This has been expected, but Powell using the word “soon” likely implies it will begin at the next Fed meeting, on May 1. The Fed would do this by increasing the rate of replacement of maturing Treasury securities it currently owns, thus slowing the ongoing reduction in its balance sheet. Powell emphasized that it is still the Fed’s goal to reduce the amount of Treasuries and mortgage-backed securities on its balance sheet, however. 

Will the Fed play it safe, politically? Normally, the central bank would want to cut rates every other meeting, but doing so for the first time in June would mean cutting a second time in September, which would make the Fed a lightning rod during the presidential campaign season, which Powell and his colleagues really want to avoid. So, the Fed may cut on June 20, July 31 and again on November 7, immediately after the election. But no matter what the Fed does or doesn’t do, it will be accused of political favoritism by one side or the other. 

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The Fed will likely continue cutting short-term rates through 2025 but will not return them to zero. Figure on the one-month Treasury bill’s yield falling to about 3%, and the bank prime rate ending up around 6%, down from the current 8.5%, after the Fed is finished reducing its benchmark rate. 

The yield on the 10-year Treasury note has been hovering around 4.3%, but will likely drift down again a bit when monthly inflation reports improve. However, yields could stay close to the mid-4’s if GDP growth is stronger than expected in the first half of the year. 

Mortgage rates won’t be changing much, staying a smidge below 7.0% on average for 30-year fixed loans. After peaking near 8% in October, 30-year fixed-rate mortgages are averaging around 6.9%, while 15-year mortgage rates are averaging about 6.2%. Good inflation reports in the next few months could result in a decline of a few tenths. Mortgage rates typically move with the 10-year Treasury note’s yield, but they are higher than normal now, relative to the Treasury yield. The recent rise in short-term rates has crimped lenders’ profit margins on long-term loans. But Fed cuts in short-term rates will boost banks’ margins and should bring some extra reduction in mortgage rates, too. 

Other short-term interest rates have risen along with the federal funds rate. For investors, rates on super-safe money market funds have risen above 5%. Rates for borrowers have ticked up, as well. Rates on home equity lines of credit are typically connected to the prime rate (now 8.5%), which in turn moves with the Federal Funds Rate. Rates on short-term consumer loans such as auto notes have also been affected. Financing a new vehicle now costs around 7.4% for a six-year loan, and 11.4% for a used vehicle. Corporate bond rates are moving with changes in long-term Treasury rates. AAA-rated bonds are now yielding 4.8%. BBB bonds are averaging 5.6%, and CCC-rated bond yields have come down the most, now averaging 12.8%.

Source: Federal Reserve Open Market Committee

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David Payne
Staff Economist, The Kiplinger Letter

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.