Economists are projecting that the Fed will cut rates in the middle of 2024, potentially if a recession is happening.
There’s been a lot of media coverage as to whether the Federal Reserve can achieve a “soft landing” for the American economy.
To do this, the Fed would have its effective Fed Funds Rate be at just the right rate in order to bring inflation to its target of 2% while maintaining full employment for Americans.
This “Goldilocks” scenario is a tall order to accomplish since there are so many economic variables and there is a lagging effect with interest rate hikes. Also, the last time there may have been a soft landing was in 1995.
I discuss how the Fed is doing a balancing act of holding rates at just high enough to bring down still-above-average inflation as of recent summer 2023 figures.
At the conclusion of the Fed’s September 20, 2023 FOMC meeting, they decided to hold rates at the current range of 5.25% to 5.5% as announced by Fed Chair Jerome Powell. However, they may still raise the Fed Funds Rate one more time.
The effective Fed Funds Rate is at its highest point in 16 years, which is 5.33% as of August 2023. Compare this to the 5.26% in July 2007! If you’re a saver, this is welcome news, but if you’re trying to buy a house with a mortgage, rates are going to stay high for a while.
It is possible that the Fed may cut rates to below 5% toward the end of 2024, but they likely wouldn’t want to be embarrassed by cutting them too soon. However, accelerating inflation from rising oil and gas prices and consumer and business spending may force the Fed’s hand to squeeze in one more hike.
CPI inflation hit 3.7% in August 2023 vs 3.2% in July 2023. PCE inflation went from 3% in June 2023 to 3.3% in July 2023, which is not the direction the Fed wants PCE inflation to go.
The inverted yield curves with both the 10 Year Treasury Bond + 2 Year Treasury Bond and 10 Year Treasury Bond + 3 Month Treasury Bond are suggesting that a recession may be on the horizon. The inverted yield curve has usually been ominously right, and we’ve had inverted yield curves since 2022.
Maybe an official recession isn’t in the cards for 2023, though many industries like apparel and video games have felt recessionary effects in their industries. Jamie Dimon of JPMorgan Chase is warning about the straining effects of additional rate hikes on business activity.
Perhaps focusing on the idea of a soft landing is distracting from the possibility that a recession is simply delayed and might happen in 2024. Of course, economists are usually moving the goal posts so who knows what will happen in the economy.
We can’t worry too much about whether a recession will happen or not, we just have to keep doing the best we can to save and invest no matter what happens in the economy.
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