Just a few months ago, everyone thought the Federal Reserve would cut rates six times this year. Now, with inflation still high and the labor market continuing to boom, a new possibility has emerged: The Fed might not cut rates at all.
“Given the strength of the labor market and progress on easing inflation seen over a longer arc, I believe the Fed’s current restrictive monetary policy is appropriate,” Austan Goolsbee, president and chief executive of the Federal Reserve Bank of Chicago, said in late April.
Back in 2023, everyone was sure the U.S. economy would fall into recession. After all, inflation had hit 9% in 2022, and the Fed was aggressively raising rates in an attempt to achieve its inflation goal of 2%. Pushing inflation from 9% to 4% was the easy part. Getting all the way to 2% has proven quite the challenge.
“So far in 2024, that progress on inflation has stalled,” Goolsbee said. “You never want to make too much of any one month’s data, especially inflation, which is a noisy series, but after three months of this, it can’t be dismissed.”
Fed officials have been sending signals along those lines. Inflation remains above 3%, hotter than the Fed’s official target of 2%, and unemployment remains below 4%. With the U.S. economy seemingly firing on all cylinders, it hardly seems time for central bankers to add fuel to the blazing fire by cutting rates.
The central bank honed in on monthly inflation figures for an obvious reason: Economists have been unsuccessful at predicting inflation during the pandemic and the post-pandemic area. Few forecast how much prices would climb in 2021 and 2022, and they likewise have struggled to keep the price-cutting momentum in full effect.
The confusion and uncertainty serve as a reminder that investors perhaps have put too much faith into both the Fed’s clairvoyance and the Fed’s policy shifts.
Meanwhile, the combination of strong growth and high rates has some analysts rethinking how the Fed affects the economy. David Kelly, chief global strategist at J.P. Morgan Asset Management, tells CNBC that the economy and markets can withstand a permanently higher level of rates.
“I don’t think that active monetary policy really moves the economy nearly as much as the Federal Reserve thinks it does,” Kelly told CNBC.
A supporting detail: The federal funds rate going back to 1954 has averaged 4.6%, even given the extended seven-year run of near-zero rates following the global financial crisis.
While analysts can debate the power of the Fed, there’s little debate about 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’s nearly impossible to accurately forecast the path of interest rates and the economy, particularly in the aftermath of an unprecedented event like the pandemic.
Investors faced a period of intense uncertainty early in the pandemic. That was followed by a couple years of outsized returns.
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