The long wait for lower US interest rates

Attention farmers and other business borrowers: Interest rates are going to stay higher longer than expected just a few months ago.

Back in late 2023, financial markets were betting the Federal Reserve would lower interest rates six or seven times this year. Fed policymakers were more cautious but even they were projecting they’d lower their benchmark interest rate to 4.6% by the end of 2024 from 5.4% at the end of 2023.

Despite inflation reports in January and February that came in hotter than expected, markets were still betting the first cuts would come in June. In March, a majority of Fed officials thought there would be three cuts this year.

Suddenly, dark clouds have obscured that sunny rate outlook. Markets are now betting on one or two cuts this year, and a year-end benchmark rate of 5%. Some investors suspect this year won’t see any cuts. In a recent interview one Fed official said “it’s much too soon to think about cutting interest rates.”

To understand the delay, a little history is helpful. When inflation took off in 2021, the Fed undermined its own credibility by being slow to react.

When it finally got with the program it made up for its tardiness with a vengeance – raising its benchmark interest rate in 11 consecutive bimonthly meetings, from near zero to a range of 5.25 to 5.5%. That was the fastest rate of increase in 40 years and brought rates to a 40-year high.

Last year, inflation finally started to recede, with the rate of price increase dropping from just over 9% in the summer of 2022 to just over 3% in the summer of 2023. By the end of the year, the Fed’s preferred inflation measure was rising at well under 3%.

At their December meeting, Fed officials sounded optimistic about rate cuts but repeated