Coming Rate Cuts Portend a 1980s-Style Economic Resurgence

The key economic question for 2024 is how to think about the interest rate cuts we’re likely to get from the Federal Reserve. Are they good news for the economy as borrowers catch a break, or a sign of impending recession as they were in 2001 and 2007?

There’s still considerable disagreement about the timing and extent of monetary easing given the recent inflation shock, but Fed policymakers clearly signaled in the minutes of their last meeting, released Wednesday, that rate cuts should begin at some point this year.

An important consideration in this discussion is how “out of sync” the post-pandemic economic recovery has been so far. Whereas the 2001 and 2007 rate cuts came at the end of an investment and/or borrowing binge, policy easing this year would come after rate-sensitive and cyclical parts of the economy have been in a slump for roughly two years. Those areas were already set to rebound somewhat in 2024 — the added boost from rate cuts could turn that recovery into something closer to a boom.

The first and most important area affected is, of course, the housing market. Homebuilders have thrived in an environment of high interest rates, enticing buyers by offering to lower mortgage costs, but the limited supply of preowned homes on the market froze resale transactions. Existing home sales in recent months slumped to levels seen following the collapse of Lehman Brothers Holdings Inc. and the bursting of the subprime-mortgage bubble in 2008.

Lower home-loan rates should help unfreeze the resale market, provide an additional boost to builders, and even give some homeowners the ability to finance renovations and add-on projects that were put on hold while interest rates were rising and recession fears elevated.

Inflation-adjusted residential investment looks poised to grow again, year over year, recovering from the deeply negative levels of late 2022 and early 2023. That’s the pattern we’ve historically seen coming out of economic recessions in the US. By spring, the housing market should feel like it’s growing again for the first time since rate hikes began.

Poised to Rebound