Journalists in the financial press often speak of a Goldilocks economy (“not too hot, not too cold”) in tribute to the Fed’s finesse in manipulating interest rates. They also use the term “soft landing” because the Fed is supposed to manage to tame inflation without causing a recession.
However, these narratives, in fact, have no basis, they are just scenarios designed to get you to buy stocks by increasing demand and, consequently, their prices.
The truth is that the Fed is behind the curve and not perfecting the economy. At the same time, there is no “soft landing”, the economy does not gradually change gears: it either grows rapidly or enters a recession.
- So where does the Fed stand today?
- Will it start cutting interest rates as Wall Street continues to (wrongly) predict?
Wall Street keeps getting it wrong
The Fed will not cut interest rates in May or June. Wall Street has been predicting interest rate cuts for nearly two years now and has been wrong every time. He now estimates a rate cut in June and will be wrong again. A rate cut at the July 31 meeting is likely, but in doubt due to the resurgence of inflation.
In any case, we have three months ahead of us during which data on inflation, unemployment and GDP will be calculated. However, if the Fed cuts interest rates at the end of July, it will not be for good reasons, but because the economy will have fallen into recession.
But given the US growth from out-of-control government spending in the lead-up to the election, the recession may be postponed. So don’t count on a rate cut in July. There is no Fed meeting in August. The next one is on September 18.
The Fed may be ready to cut rates by then, but there’s a catch: The Sept. 18 date is just seven weeks before the Nov. 5 election. The Fed pretends it doesn’t make politics, but in reality its decisions are highly political.
A rate cut in September would be seen as helping Biden, boosting the economy and hurting Trump. At the same time, Trump, based on polls and trends, is the likely winner. The Fed doesn’t want to boost Biden and hurt Trump if Trump is going to win.
Trump will make her public enemy No. 1, and that’s the last thing they want. So the Fed will get a pass in September. There is no Fed meeting in October. The next two Fed meetings then are on November 7 and December 18, both safely after the election. The Fed could cut interest rates at both meetings, but is unlikely to.
The Fed’s time is running out
On March 20, the Fed pushed the narrative that there would be three rate cuts before the end of the year. However, if it does not ease monetary policy in May, June, July or September (for reasons mentioned above) and there are no meetings in August or October, then it will have at most two rate cuts this year, in November and in December.
In short, the Fed is one meeting away from making three rate cuts and may have to settle for two. Her reckless promise and the dictates of the calendar drive the stock market. The stock market is fixated on the Fed, but the Fed doesn’t know what it’s doing.
This is a recipe for volatility and portends a sharp reversal in Q1 earnings. So why isn’t the Fed cutting rates in May? They could make an announcement. The Fed believed it had won the battle when inflation fell from 9.1% (yearly CPI) in June 2022 to 3.0% in June 2023.
That’s when the June 2023 reading was published, in July 2023, when the Fed made one last hike sending the maximum interest rate to the 5.25% – 5.5% range. The problem is that inflation has not stopped rising. From 3.0% in June 2023, it rose to 3.7% in August and to 3.7% again in September 2023. Inflation has hovered between 3.1% and 3.4% until recently, while in March stood at 3.5%, 0.3 percentage points higher than February.
Oil rose 24% in 4 months
It is not just inflation that is rising. The price of oil was $68.50 a barrel last December and is over $83.00 a barrel today, up 24% in 4 months. This oil price shock has yet to work its way through the supply chain.
It has resulted in some price increases, but most are in the works. This rise in the price of oil will keep inflation at current levels or higher in the coming months. The Fed is looking for signs that inflation is easing but is not going to get them, as seen in the latest inflation report.
Higher oil prices mean higher transportation costs, whether by truck, train, plane or ship, as all goods must be transported to market. This means that the price of all things goes up. Other factors driving supply-side inflation include the collapse of the Key Bridge in Baltimore, the closure of the Red Sea/Suez Canal shipping route, and the ongoing impact of sanctions from the Ukraine war.
Some of these supply-side constraints may be deflationary in the long run, but they are certainly inflationary in the short run.
Runs on Fed Happy Talk
The stock market runs on Fed Happy Talk. That situation could end abruptly on June 12 if the Fed does not cut rates and signals that no rate cuts are expected in the near future — and perhaps not before the end of the year.
Until then, we may face one of the worst possible economic scenarios:
recession + inflation = stagflation.
Anyone under the age of 60 probably has no familiarity with stagflation. It was a nightmare for stockholders. (The long-term bull market in stocks did not begin until August 1982.)
