Fed Throws Cold Water on Rate Cut Hopes

bucket of cold water

Wall Street has been hoping for months for the Federal Reserve to start cutting interest rates. It wants a return to what it sees as the glory days, when zero interest rates meant trillions of dollars of easy money entering the financial system to drive the prices of financial assets ever higher.

But the Federal Open Market Committee last week decided once again to keep the target federal funds rate at 5.25-5.50%. Even worse in Wall Street’s view, the Fed threw a bucket of cold water on hopes for rate cuts anytime soon.

Inflation Still Paramount

While many financial pundits have all but declared victory in the Fed’s fight against inflation, Fed Chairman Jay Powell is much less sanguine. After last week’s continued rate pause, Powell stated that he would need to see much more assurance that inflation was headed towards the Fed’s 2% inflation target on a sustained basis.

We’ve seen inflation reach as low as 3%, but it most recently jumped back up to 3.4% year on year. Until inflation rates break below 3%, and stay there for at least a few months, it would be premature to expect the Fed to consider cutting rates.

We’ll find out next week what January’s inflation rate was, but at this point, given the inflation situation, it seems nearly impossible for a plausible case to be made for the Fed to cut rates at the March meeting.

Market hopes seem to be fading for a March cut anyway, with May now being seen as a more likely point for rates to get cut. But again, inflation would have to come down significantly for a May rate cut to take place.

Can anyone imagine inflation dropping from 3.4% to well under 3% over the next three months? Even if inflation were to drop to 3.2%, 3%, and 2.8% in the next three months, would that be enough for the Fed to start cutting rates?

Confusing Labor Market Signals

The other major factor the Fed takes into account when cutting rates is the state of labor markets. And to say that labor markets are confusing right now is an understatement.

On the one hand, the most recent jobs report claimed that the economy added over 350,000 jobs, far surpassing expectations. On the other hand, layoffs increased to the second-highest level on record.

If this dichotomy seems confusing to you, just imagine how it feels for Fed policymakers, who are expected to decide on monetary policy using this conflicting data. But with the headline unemployment rate staying at 3.7%, even with layoffs taking place throughout the economy there’s nothing pressing the Fed to cut rates.

The Market Reaction

Financial markets have reacted as expected, with stock markets seeing some losses as hopes for quick rate cuts are fading. It’s kind of sad to see markets reacting negatively to economic data that shows the US economy is supposedly healthier than most people think it is.

Interest rates are starting to price back out the rate cuts that had been priced in after the December FOMC meeting. The yield on 10-year Treasuries is up 30 basis points just since February 1st, while the 6-month and 1-year Treasury yields are up 10 and 19 basis points respectively.

Reflecting that, mortgage rates have moved back over 7%, something that will likely keep the housing market depressed. Don’t expect to see lower mortgage rates until the Fed gets much closer to cutting rates.

Political Considerations

The elephant in the room, of course, is the fact that we’re now in the midst of the 2024 Presidential election cycle. The Biden administration has to keep up the facade that the economy is doing well if Biden wants to win reelection.

In order for that to happen, the Fed is going to be under an incredible amount of pressure not to do anything to tank the economy. If it cuts too early, it’s going to be accused of trying to juice the economy to benefit Biden. And if it cuts too late, it’s going to be accused of throwing Biden under the bus.

Chairman Powell is in a position that no Fed Chairman wants to be in, having to balance both economic considerations and political considerations at a time when the economy could be facing a 2008-style recession. The chances of making a mistake that could really screw up the economy due to putting political considerations first can’t be ignored.

The Takeaways

The thing to remember about the Fed’s rate cut drama is that in the short term, not much is going to change. With odds for a March rate cut plummeting, expect at least 2-3 more months of the status quo before rate cuts come up again as a possibility.

Keep your eyes on inflation and unemployment data in the meantime, because if there isn’t much movement in those figures, even a May rate cut might not be in the cards, and the first rate cut might not come until mid-year.

Right now Powell expects the Fed to cut rates three times this year. That would indicate a federal funds rate of 4.50-4.75% by the end of the year, assuming each cut is 25 basis points. Of course, we know how horrible the Fed’s forecasting is, so that has to be taken with a grain of salt.

Still, the Fed does seem to indicate that rate cuts are next on the menu, and that further rate increases aren’t on the menu. And that could mean a few things.

Among the most important things to keep in mind is that Fed rate cuts very often precede a recession. So once the Fed starts to cut rates, it could be only a matter of months before recession occurs.

Many Americans have already started to protect themselves against possible recession by buying precious metals like gold and silver. Gold and silver have served as safe haven assets for centuries, and their popularity as safe havens hasn’t diminished recently.

Demand for gold has pushed gold prices to over $2,000 per ounce, with gold setting all-time highs late last year. And the outlook from gold analysts is for gold to build on its strength this year and continue gaining in value.

If you’re worried about the future of the economy and nervous about the possibility of a 2008-style recession, maybe it’s time to start thinking about gold. After all, during the 2008 financial crisis gold gained 25% during the same period markets lost more than 50% (October 2007 to March 2009).

Given gold’s track record, its current performance, and its potential in the future, there’s a lot to recommend it. Give Goldco a call today to learn more about how gold could help you safeguard yourself against future financial calamity.

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