The entire financial press’ narrative of a “soft landing” of the economy – US and global – and avoidance of recession is fostered through the “uses” of the FED and ECB, with the former fueling investor expectations for aggressive rate cuts in time that has simply put a “brake” on their rise.
What they cannot openly state is that the era of “easy money” is over and that recession is the only way to deal with persistently high inflation. On the other hand, it appears that, contrary to their statutory independence and their mandate to maintain stable financial conditions, that they serve specific political goals – to cover up the failure of the economic policy of the Biden administration and the corresponding European elite
Notably, the FED’s Federal Open Market Committee released the minutes of its December meeting, and their contents further reinforce the view of many investors and Wall Street observers that the FED plans to implement rate cuts by mid-2024.
Specifically, the most recent poll of market participants expects the Federal Reserve’s first policy rate cut to take place in June.
This contrasts little with what the FOMC members themselves expect, who, in their own internal research (ie, the Summary of Economic Projections, or SEP) overwhelmingly recommend a policy rate cut of at least by 50 basis points this year.
Or as the minutes specifically put it: “virtually all participants indicated that, reflecting improvements in the outlook for inflation, baseline projections suggested that a lower target range for the federal funds rate would be appropriate through the end of 2024.
The unclear message and the objectives
All this gives the impression that the FED is ready for imminent rate cuts. The FED’s messages overall, however, are designed to do anything but send a clear message.
This phenomenon helps to demonstrate how ephemeral her decisions are at any given moment and to what extent they are shaped by political goals. The FED’s mixed messages, as we’ll see below, help illustrate how the FED seeks to serve various political interests, notably those of the Biden administration, while trying to avoid the pitfalls of both high price inflation and economic stagnation. – a goal in itself unattainable.
Manipulations and oracles
For example, a month before this most recent shift toward rate cuts, Jerome Powell emphasized that the committee had no plans to cut rates, telling reporters in November: “The fact is, the committee is not thinking not at all reducing interest rates at this time. We’re not talking about rate cuts… We’re still focused on the first question, which is “have we achieved a monetary policy stance that is tight enough to reduce inflation to 2% over time, in a sustainable way?”, that is the question we are focusing on, he added.
Of course, as of the December meeting, the rate of inflation had not returned to the arbitrary 2% target the FED devised some 20 years ago. The early December CPI reading (minus food and energy) was at 3.9%, almost double the target rate while we will always have to look at the “hard” data on rising inflation.
In addition, employment has softened slightly thanks to the effects of the massive monetary inflation recorded in 2020 and 2021. However, to no one’s surprise – and contrary to Powell’s previous claims – the Fed turned to “talking about rapid interest rate cuts’ and without achieving its stated objectives.
Powell’s comments sparked a market rally as investors took his comments to mean a new round of “easy money” is in the works for 2024. That’s almost certainly true, but FED staff also hinted at the talk at the same time for “easy money. New York FED President John Williams said the next day “We’re not really talking about rate cuts right now.”
It wasn’t the end, though. A day after Williams confirmed that rate cuts were not really on the table, Austan Goolsbee, head of the Chicago Fed, announced that the FED should start worrying about the employment situation. As Goolsbee put it: “We have to think about how restrictive do we want to be, and are there risks on the tenure side of employment?”
What he means is that the FED has been worried about inflation long enough and now it’s time to go back to easy money in order to keep employment high.
The FED appears to operate as a political rather than a purely economic institution
How can we interpret all these mixed and contradictory messages?
We certainly shouldn’t look at it all as if the FED were full of objective scientific observers who just go where the numbers take them. When FED officials claim that they are “data-driven,” they are either blatantly lying or kidding themselves.
The Federal Reserve, like the ECB, is not a market institution. It is a policy tool of the government. Powell and the FOMC are trying to play a complex political game of balancing expectations among certain groups.
The FED in an election year will at least seek to avoid raising its target rate further, as that could trigger a rapid recession. The FED wants to keep the White House happy – it has been for decades.
Indeed, to that end, the FED would prefer to cut the target interest rate immediately. But the FED also fears a public backlash to higher price inflation – which the rate cut is likely to fuel. This means a simple “pause” in the rise in the target interest rate.
Investors and cash flow
The FED wants to serve conflicting policies, however, so one strategy it uses to do so is to repeatedly hint that rate cuts are on the horizon — without actually cutting its key rate.
After all, finance students are taught that investors calculate value based on expected future cash flows.
So, if the FED hints that “rate cuts are coming” – as the FOMC’s SEP clearly suggests – that signals to investors that cash flows dependent on “easy money” will improve “soon.” What qualifies as “soon” is never defined far enough in advance, but that doesn’t matter to the FED as it plays the expectations game and keeps the market in a state of optimism.
In this way, the FED can keep the target interest rate steady as there is a fear of price inflation on the one hand. On the other hand, it can vaguely promise interest rate cuts when the first sign of real trouble appears.
We can see this strategy in the December FOMC minutes, which did not include any hawkish statements about rate cuts. However, the minutes are more clear on whether the target policy rate will rise, and the text strongly suggests that the policy rate is “likely near its highest point for this tightening monetary policy cycle.”
This is easy to see since the FED “stopped” at 5.5% last summer. It is very rare for the FOMC to return to a rate hike after the rate hike has been on hiatus for more than two months.
What comes after the price cuts?
Wall Street and Biden administration officials will continue to push for rate cuts. However, in our current economic climate, neither Wall Street nor the White House should expect the cuts to produce economic miracles.
There may be a significant contraction in economic activity even if interest rates fall, as the availability of credit worsens even as interest rates fall, but markets continue to “feed” the economic bubble.
This is when we are in an environment in which the private economy outside the financial sector is in recession, but the overall picture does not look so bad thanks to financial “bubbles” and rising government spending that fuels the budget deficit and debt.
Interest rate cuts right now would help Wall Street and Washington, but do little to help small business employment.
When will the FED cut rates again?
The cuts will come when Powell and co fear recession more than inflation. If the FED starts cutting interest rates aggressively, that means the FED is very scared.
So if Wall Street actually gets what it wants—a rate cut of, say, 75 basis points or more—that’s a signal that the FED sees very bad news on the horizon.
The FED will never admit it sees trouble ahead. After all, then-chairman Ben Bernanke insisted there was no recession in 2008 – and we all now know what was going on. It is well known that the FED generally begins to cut interest rates by operating fire engines.
The sure recession
We can see this play out in the lag between interest rate cuts and the onset of recession.
Rate cuts tend to start several months before recessions become apparent:
So when the FED starts cutting interest rates, it’s a pretty safe bet that a recession is underway. Bigger rate cuts also tend to signal bigger problems.
Before the public catches up, however, the FED can get away with vague, confusing and contradictory messages that give the impression that it is fine-tuning a sensitive financial instrument.
In fact, FED is just playing political games to keep the Biden administration in power.
