Before last week’s Federal Reserve meeting, I accurately forecasted that the Fed would leave its target rate for fed funds unchanged, keeping the federal funds target at 5.50%. This makes 16 Fed meetings in a row, dating back to March 16, 2022, when I got the Fed forecast right. The Fed’s press release last Wednesday provided significant insight into when they might cut rates and even left open the option that they might raise rates.
The key phrase in the press release was, “The committee does not expect it will be appropriate to reduce the target ranges until it has gained greater confidence that inflation is moving sustainably toward 2%.” In plain English, the Fed does not have confidence today that inflation is contained. Powell made this explicit in his press conference, stating that the Fed needs to see more evidence that inflation is under control before considering rate cuts.
Inflation has come down but not far enough, and lately, it has actually been going up, possibly due to rising oil prices. The Fed is nowhere near to rate cuts, and Powell effectively said that. He even provided a detailed forecast about the next meeting on March 19-20, 2024, stating that it’s unlikely the committee will reach a level of confidence to reduce rates at that meeting.
My expectation is that Powell and the Fed will cut rates by midyear, possibly at the June or July FOMC meeting. However, this rate cut will not be based on a soft landing or Goldilocks narrative. It will be based on the view that the economy will slip into recession and disinflation, and even deflation will be dominant. The cut will be required by unpleasant economic conditions.
Powell will not be swayed by politics, and there is no secret plan to help Biden with rate cuts. Nevertheless, a rate cut will still be cheered by Democrats while Republicans will accuse Powell of favoring Biden, which won’t be fair, but it will be the perception.
In the meantime, rates will stay where they are, QT will continue, monetary policy still tilts toward tightening, and stocks will take a breather until the pivot crowd gets more clarity. When the rate cuts come, it will be a case of being careful what you wish for, as rate cuts in a recession will be awful for stocks. There is no such thing as a soft landing.
The next Fed meeting is March 19-20, and a lot will happen between now and then, including more data on inflation, unemployment, and economic growth that will affect the Fed’s decision-making process. I’ll be watching all of it carefully and bringing you the latest analysis as events unfold.
Let us know what you think, please share your thoughts in the comments below.
