Weakest Parts of the Economy Are Hindering Rate Cuts, Too

When people think about the Federal Reserve and interest rates in 2024, one common view is that economic growth and inflation remain too hot to justify rate cuts. Another is that the labor market and inflation continue to cool, and it will soon be time for rate cuts.

In deciding which of these opposing views will prevail, it’s helpful to look at the parts of the economy that the Fed has slowed most effectively. In sectors such as housing and manufacturing, the downward pressure from high borrowing costs is abating after a difficult few years. These areas are somewhere between bottoming and recovering even without Fed cuts. A meaningful easing cycle would likely create the conditions for a boom at a time when the central bank is still struggling to contain inflation — meaning any accommodation will need to wait until parts of the economy that have been less Fed-sensitive start to moderate.

The place where the central bank’s impact has been most pronounced is in housing, particularly the resale market where the pace of transactions bottomed at a 3.85 million annualized run rate last October, around the levels seen during the worst of the 2008 Great Recession. The number of owner-occupied homes in the US has increased by roughly 15% since then, so the overall turnover rate was effectively lower at the end of last year than it was at the end of 2008 when the economy was imploding.

Sales of existing homes have begun to recover modestly over the past several months, and as inventory levels rise, softening prices in some locations, that’s likely to continue even with elevated home loan rates.