The Fed has been wrong about the economy for years.
federal reserve The rate cut cycle is very likely to end–However, it may take months for Fed officials to understand this.
The last time the Fed raised the overnight rate was a long time ago, in July 2023. Increased federal funds target from 5.25% to 5.50% range. At the time, the Fed believed that interest rates at these levels would weigh heavily on economic growth, pushing the economy closer to recession or at least into a prolonged period of low growth.
The Summary Economic Projections (SEP) released at the last Fed meeting in June 2023 showed: Officials had expected economic growth to be just 1% in 2023. Growth is expected to rise to 1.8% by 2025, which also happens to be the Fed's long-term growth forecast for the U.S. economy.
The Fed also Unemployment rate is expected to rise rapidly. As of summer 2023, the unemployment rate was hovering around 3.6%. In their June forecast, officials expected the rate to rise to 4.1% by the end of the year, essentially triggering the Therm Rule recession indicator. This was actually better than in March, when the unemployment rate at the end of 2023 was predicted to be 4.5%. The unemployment rate is expected to rise to 4.5% in 2024 and remain at that level in 2025.
Now you can see why Fed officials were nervous. Reducing the growth rate to 1% would mean there could be a slight stagnation in the economy. push it into contraction. The expected rise in unemployment would mean increased economic hardship and would certainly have felt like a recession to many Americans.
Oops, it's not monetary policy.
of course, The Fed got this all wrong. The economy grew 2.9% from the fourth quarter of 2022 to the fourth quarter of 2023, nearly three times the rate the Fed had projected along the way. It is likely to grow at a similar pace this year, well above the 1.1% expected. The unemployment rate was 3.8% at the end of 2023, but it was only 4.1% at the end of last year.
In other words, the Fed's interest rate policy is exactly placed less emphasis on growth and employment That was as expected by Fed officials.
But somehow, The Fed didn't learn this lesson.. When it began cutting rates in September, it predicted economic growth would be very slow in the second half of 2024, with the unemployment rate rising to 4.4% and remaining there until next year. Fed officials' comments made it clear that they believe their predictions of a softening labor market are finally coming true.
Recent economic indicators have revealed that The Fed began cutting rates when it was still too pessimistic about growth and jobs.. Fed officials now expect the economy to grow 2.5% in 2024, according to their December forecast. It also forecasts the unemployment rate to reach 4.2%, which is already shown to be too high after stronger-than-expected jobs data released last week.
The Fed said in December that it expected the federal funds rate to fall to a range of 3.75% to 4% in September, equivalent to two more rate cuts. Currently, the market has a less than 1 in 3 chance of that happening. There is 40% chance of being cut only once, 30% chance of not being cut any more.
No more cutting required
The Fed is not expected to cut rates this year. Certainly, there is a high possibility The Fed's next action will be to raise interest rates. It turns out that employment is less sensitive to monetary policy than expected, and inflation remains at a level inconsistent with the Fed's 2% goal.
That doesn't mean we expect interest rates to rise anytime soon. Many officials still consider current interest rates to be restrictive and believe there is still room to lower them. It will probably take several months, with strong jobs numbers and stubborn inflation, to convince the Fed of the depth of its mistake when it began cutting rates in September. However, the discussion among investors is very likely to shift to when interest rates will rise. What would it take to cause interest rates to rise?.
surely, The bond market seems to agree that the days of Fed rate cuts are over.. They expect yields on 10-year Treasuries to rise above 5% this year as investors become convinced that the Fed's next move will be to raise rates rather than cut them.
What would it take to start raising interest rates early? Probably a combination of rising inflation expectations and a rise in the consumer price index above 3%. Otherwise, it probably will be Slow march towards inevitable Fed rate hikes.
