February 12, 2024
The Federal Reserve telegraphed interest rate cuts this year, which many people (including Wall Street) took to mean the cuts would commence quickly. But with gross domestic product at 3.3%, those rate cuts could be further down the line than people think.
Of course, that GDP figure could be revised up or down, but at 3.3% growth, the economy isn’t in trouble. Also, despite the overall downward trend of inflation, the Fed’s preferred inflation gauge (the personal consumption expenditures price index) showed a modest uptick in December 2023.
Taken together, these data points could keep the Fed from cutting rates soon, especially considering unemployment is steady right now. In other words, we don’t seem to be heading for a recession, which would push the Fed to act.
The Fed could also act if it felt employment or inflation was too low. Rate cuts in this context would aim to lower borrowing costs, encourage investment, and boost spending throughout the economy. But right now, we’re not in that situation.
Interestingly, people think interest rate cuts are bullish for stocks. But when the Fed ends a tightening cycle, usually the market declines. Given that, it’s anybody’s guess why investors would want rate cuts at all. But we all know how the reality of hard data and the narrative of popular consensus often don’t align.
The Fed will cut rates eventually. However, considering the current state of affairs, I just don’t see it being in the first half of 2024. That is, unless some sort of unforeseen, negative event or events take place.