As Fed Meets, Wall Street Wants to Know When Rates Cut Will Start

The Federal Open Market Committee (FOMC) will meet this week for its first monetary policy meeting of the year. While no one expects the Fed to cut rates at this meeting, they’re at least expecting to get some hint at when the Fed might begin to cut rates.

Right now markets are expecting just under a 50/50 chance of the Fed cutting interest rates at its March meeting. This is a change from December, when markets had somehow convinced themselves that a March rate cut was a done deal.

In fact, if you look at bond yields, the yield on the 10-year Treasury has risen back almost to where it was before the December FOMC meeting, after having dropped 20-30 basis points after that meeting. So the rate cuts that markets had been pricing in are now being priced back out again.

But while the odds of rate cuts in March are declining, most people think that interest rates will be lower by May, with markets expecting an 88% chance of lower interest rates by then. Still, there are some headwinds that are working against the possibility of rate cuts. Here are just a few.

1. The Fed Hasn’t Beaten Inflation

Everyone seems to forget that the Fed hasn’t whipped inflation yet. While inflation rates may not be as high as they were in 2022, they’re still at 3.4% year on year, with a recent upward trend.

You wouldn’t know that from reading the news, however, with multiple so-called experts trying to claim that the Fed should declare victory against inflation. But just like Mark Twain, the reports of inflation’s demise are greatly exaggerated.

Some Fed officials realize that, which is why they’re continuing to monitor inflation. And with two more inflation reports coming out before the March FOMC meeting, the Fed should have all the information it needs by March to determine which way inflation is trending, and how movements in inflation should impact monetary policy.

Even if the Fed does decide that higher inflation is palatable, it’s unlikely that it’s going to cut rates if inflation remains above 3%. Without a firm and sustained trend downward, the Fed doesn’t want to risk overheating the economy by cutting rates at a time it deems to be too early.

2. Job Market Isn’t Too Bad Yet

Despite the many companies that are downsizing and tightening their belts, that isn’t being reflected in labor market statistics. Read the monthly jobs reports and you’d think that the economy is growing by leaps and bounds and putting more people to work.

The unemployment rate is still a low 3.7%, and there aren’t any expectations for that to change. As long as labor market statistics continue the way they are, they’re not going to put any pressure on the Fed to cut rates.

3. High-Flying Stock Markets

Stock markets continue to hit all-time highs, which is puzzling. Earnings and forward guidance for many companies have been disappointing, yet stock prices continue to surge.

The Dow Jones and S&P 500 have hit new record highs, despite the fact that the Fed has trimmed over $1 trillion from its balance sheet. The Fed’s quantitative tightening hasn’t really had a negative effect on stock markets.

Part of that could be the fact that the money supply is no longer falling, and is actually growing again. It’s going to take some deep diving to see why exactly that’s happening, but that could be one factor.

The other factor is that markets could be going on a tear because they’re hopeful of rate cuts. And every piece of news that fits into the rate cut narrative is seen as a reason to keep buying.

If that’s the case, then this market rally may very well fizzle out once reality sets in. But until then, the Fed is likely going to be unwilling to cut rates in the face of a hot market.

The last thing the Fed wants to be known as is an agency that exists to boost stock market returns. So with markets already at record highs, that’s another reason for the Fed to exercise caution with its rate cut decision.

How This Impacts You

If you’ve continued plowing money into stock markets over the past year or two, you’re probably welcoming the new record highs. Many Americans who are invested in markets are likely enjoying seeing their retirement account balances continuing to grow.

But at some point all of this will change. There’s a reason companies are pulling back on earning forecasts and tightening their belts.

American households are incredibly indebted and financially overburdened, and consumer spending is likely to falter this year. As consumer spending drops, so too could the economy.

In all likelihood the Fed will have to cut rates at some point this year, but it will be to try to counteract a developing recession. And when rate cuts do come, it could be a warning sign that there is worse to come.

Many Americans who foresee the coming recession have already taken steps to protect their financial assets with precious metals like gold and silver. And there’s still time for those who haven’t to figure out how to protect themselves before recession comes.

No one knows how bad the next recession will be, but given how large the debt bubble has gotten, it could be worse than 2008. Can you afford to leave yourself open to 50% or greater losses like 2008?

If you’re looking to protect yourself against recession, gold and silver can be one way of doing that. Gold and silver have served as safe haven assets for centuries, helping protect wealth through good times and bad.

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