Not so long ago, investors expected the Federal Reserve to cut rates six times in 2024. But still-high inflation and a still-strong job market keep throwing wrenches into those optimistic plans.
Now, it seems likely that the central bank will hold off on cutting rates, and it is almost certain to make fewer cuts this year than investors once expected.
“The bond market at the start of this year thought they were going to cut six times,” Robert Dietz, chief economist of the National Association of Home Builders, said during the International Builders Show in late February. “That was not going to happen. The macroeconomic environment was too strong.”
Fed officials have been sending signals along those lines. Inflation remains above 3%, hotter than the Fed’s official goal of 2%. GDP growth continues to outperform, and unemployment remains below 4%. With numbers like that, it hardly seems time for central bankers to stomp on the accelerator by cutting rates.
“The economy is still strong, we expect to see positive growth and inflation to keep coming down,” John Williams, president of the Federal Reserve Bank of New York, told reporters in late February at the Long Island Association Regional Economic Briefing. “So something like three rate cuts is a reasonable starting point when you think about it.”
Williams also underscored the point that the Fed doesn’t necessarily care that investors had been banking on half a dozen easings in 2024. “It’s not going to be calendar based, and not be on a specific fixed schedule, but focused on the data,” he said.
On that topic, the regional Fed presidents seem unified. “We always say we will be data dependent,” Raphael Bostic, head of the Atlanta Fed, said in late February. “The data will be the guide that tells us how much or how fast or when we should actually move our policy.”
The flurry of public comments served as a reminder that investors have been assigning perhaps too much optimism to the potential for a pivot by the Fed. Yes, the Fed was too slow to respond to the threat of inflation during the pandemic. And when it did spring into action, it raised rates more than many investors and economists agreed was necessary.
But there is little arguing the economic fundamentals: Despite the Fed’s best efforts to spur a recession, the U.S. economy keeps booming. Some sectors experienced slowdowns, but the overall impression is one of a remarkably resilient economy – one that can shake off the highest rates in decades.
For investors, the seesawing outlooks serve as a potent reminder that it is nearly impossible to accurately forecast the path of interest rates and the economy, particularly in the aftermath of an unprecedented event like the pandemic.
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