Reality Check

Today, the Fed made it clear there’d be fewer rate cuts in 2024, most likely one or two, with a start more likely after the election than before. Meanwhile, the Fed made a mess out of explaining its logic for their new path forward.

The Fed’s statement was a virtual non-event, with only one notable wording change – a “lack of further progress” on inflation has become “modest further progress” – a nod to this morning’s CPI release.

From there, things start to get a bit confusing. The committee’s economic projections showed no change in its expectations for GDP growth and the unemployment rate for year-end, and minimal change in the inflation outlook, yet the committee changed its expectation for the appropriate pace of rate cuts in 2024 from three down to one. More confusing is that their forecasts for year-end readings on “core” inflation (which excludes the volatile food and energy components) and the unemployment rate – proxies for their dual mandate of price stability and maximum employment – reflect absolutely no change from current readings. You read that right, the Fed forecasts that “core” PCE inflation will end the year at the exact same twelve-month rate that we have witnessed through April, and the unemployment rate won’t rise or decline between now and the end of December.

In other words, conditions today don’t warrant a rate cut, but if conditions don’t improve between now and year-end, the Fed will then have the confidence that it’s time to start cutting rates. Likewise, with little to no change in their forecasts for growth or inflation in 2025 and 2026, they have bumped up their expected pace of rate cuts in each year by one so, despite the slower pace of rate cuts in 2024, we see rates end in the exact same spot as previously forecast by the time we reach year-end 2026.

What would we take away from today’s report? The Fed is at a loss for why progress on inflation has stalled and where they will go from here. They believe they have done enough to bring inflation in check, but they aren’t seeing results. In our view, they have been following the wrong signals since the start; ignoring the growth in the M2 money supply in favor of blaming supply changes, which resulted in targeting a symptom rather than the disease. They flooded the system with excess reserves, muting their ability to manage economic activity through monetary policy and putting themselves in the awkward position of running large losses. They find themselves reacting to stubbornly high inflation they told us would be transitory, and constantly trying to explain away why their forecasts have been off base. Confidence is justifiably waning.

We do expect that the Fed will cut rates once later this year, likely after the elections, but we see cuts coming as economic weakness leads to higher unemployment and modest progress on inflation. The morphine is wearing off and the aftereffects of money printing, excessive and misguided spending from Washington, and companies getting a bit over their skis in terms of hiring will lead to a more turbulent back half of 2024.

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