“No Cuts For You!” The Inflation Battle — The Fed to choose between inflation and cutting rates
During a strong conversation at dinner last night with 8 business colleagues, all 8 of them were betting that The Fed would cut rates in 2024. I was in the stand alone position that The Fed will not cut rates in 2024, as the U.S. heads into unprecedented economic growth in 2024, along with a large willing educated and unskilled labor available, lots of innovation, resources and research going on in so many sectors, cash in the system, the U.S. is the third largest population in the world and largest economy.
The facts are that The Fed has a 2% inflation target. While inflation has declined in 2023, it still remains nearly double its 2% target. Monetary policy remains tight. We have seen disinflation, but not deflation. Disinflation is when the inflation rate remains positive — above 0. Deflation is when inflation falls below 0. The decline in inflation is now 3.1 to 3.4%, yet still higher than 2%. Recall that inflation hit 9% in 2022. GDP remains high, as the U.S. economy grew 5% in Q3 2023, and also grew greater than 2% in Q4 2023. As well, employment remains strong, and the U.S. economy would need to absorb higher labor costs. December CPI rose 3.4% over the prior year, and an also reflects an increase from the 3.1% increase seen the month prior.
The assumptions I am making are that inflation is not coming down in the near term, and inflation prompts debt markets to increase interest rates in anticipation of further inflation. There remains supply shortages which will feed into higher prices. The current disruption in the Red Sea will impact inflation by directly increasing prices, and indirectly delaying the availability of goods. Just because the inflation rate is falling, it does not mean goods are getting cheaper, just that their prices are rising at a slower pace. As well, The Fed is vague about when it will begin to cut rates; in fact, it hasn’t even officially announced the end to its hikes yet. As it stands now, the Fed has paused rates at about 5.25%
My 2024 forecast is that until inflation is below 2%, there will be no rate cuts. In addition, the Economy needs to slow. The Fed has zero tolerance for inflation above 2%. In addition, if the target is to keep “Average inflation” at 2%, then the Fed would not cut interest rates until inflation is reduced to below zero for more than a year. As well, I predict that U.S. interest rates will peak at 8%. Wall Street doesn’t like this. So while Biden continues to tout that “inflation has been conquered and it is time to pivot to lower rates”, then the narrative in the mainstream media and financial markets reflects what Biden is pushing for — lower rates. As I stated, there remains a lot of momentum in the Economy. In addition, without an economic downturn nor a recession, then there will be no rate cut in 2024. Therefore, both Q1 and Q2 in 2024 would need to report consecutive negative growth in order to justify a potential rate cut in Q3 2024. This will not happen. Gerard Rotonda
