Federal Reserve (Fed) policymakers left their benchmark interest rate unchanged and near the highest level of this century – where it has held since mid-2023 – amid lingering inflation worries.
However, Fed officials on Wednesday hinted that costs are nearing a healthy level. That could open the door for rate reductions and lower borrowing costs ahead of a major expansion of the Lower 48 natural gas industry.
Fed policymakers anticipate cutting rates three times in 2024. During a press conference Wednesday, Fed Chairman Jerome Powell stopped short of a specific timeframe, but he said "sometime this year” rates could start to trickle lower.
BNP Paribas’ Carl Riccadonna, chief U.S. economist, said the Fed report “makes us more confident in our expectation for the first cut to come in June.” That is the consensus of futures markets this week.
When Fed policymakers act on rates, they are likely to move slowly, bringing rates down by a quarter of a percentage point at a time. This would not drop borrowing costs dramatically this year. It could provide a sense of certainty, though, on the direction of monetary policy and suggest that the Fed views both inflation and the overall economy as stable, Samco Capital Markets’ Jacob Thompson, managing director, told NGI.
Such bullish assurances from the Fed could bolster confidence among energy companies in expansion mode, Thompson said. This would notably include the spate of natural gas exporters that are planning to begin commercial operations from several LNG facilities along the Gulf Coast between late this year and the end of the decade.
While financing plans are largely in place for these multi-billion dollar projects, the potential for lower borrowing costs later this year and beyond could pave the way for loan refinancing activity and, by extension, lower debt payments and strengthen profitability for these burgeoning operations. That would in turn add confidence to the long-term viability of a U.S. export complex that is poised to roughly double its demand for natural gas over the next several years.
“It’s not necessarily a direct line from the Fed to any one company’s savings or profits, but it’s safe to assume that lower rates would support growth,” Thompson said.
The looming liquefied natural gas demand is widely expected to prop up natural gas prices that have struggled for the last several months amid a mild winter, record production and elevated levels of supply in storage. Production reached all-time highs around 107 Bcf/d early this year. As of mid-March, underground inventories of gas were 41% above the five-year average.
The April natural gas futures contract on Wednesday settled at $1.699/MMBtu, down 4.5 cents on the day. Futures prices were trading this week at about $1.00 below the values posted in March of last year.
Cash markets are also under pressure. For example, NGI’s March Bidweek National Avg. fell $1.710 month/month to $1.505/MMBtu. That was down from $2.870 a year earlier.
However, exploration and production companies have scaled back their gas production over the past several weeks to align output with seasonally light demand – without pulling back too sharply and creating a risk of undersupply when the LNG wave mounts. Production hovered around 101 Bcf/d this week, according to Wood Mackenzie data.
Price Momentum Ahead?
Adjusted natural gas output levels and a spike in demand on the horizon could send the futures market higher in coming months. Physical markets may follow suit, particularly if cooling demand proves strong this summer.
If not this summer, then at least by early 2025 “we expect a material inflection in the market as LNG demand ramps into a subdued supply environment,” Tudor, Pickering, Holt & Co. analyst Matt Portillo said.
As far as interest expenses, the Fed drove up its benchmark rate multiple times over the course of 2022 and last year – more than doubling borrowing costs. It did so to curb spending and inflation, which reached a 40-year high of 9.1% in mid-2022. The interest increases made a big impact. The inflation rate stood at 3.2% in February.
Still, inflation continues to hover well above the Fed’s preferred long-term level of 2%. That is the level at which the economy can grow steadily without price shocks, officials have said. Fed officials on Wednesday kept their target rate in a 5.25-5.50% range.
Raymond James chief economist Eugenio Alemán said inflation is nearing an inflection point, with wage growth softening. He expects rate cuts this year.
“We are not saying the road ahead is not going to be bumpy for markets and for the Federal Reserve, but there is light at the end of the tunnel,” Alemán said. “As long as the Fed continues to see improvement” in key consumer price readings, “it will become more confident that inflation will remain under control and thus will be willing to start to lower interest rates as soon as midyear.”
Also on Wednesday, the Fed said it expects the U.S. economy to grow at a 2.1% pace this year. It predicted 2% growth in 2025.
