The Weight and Watching

The Weight from the Canadian-American rock group The Band is probably their best-known song.  Its lyrics evoke feelings of burdens, responsibility, and interconnectedness of community obligations.  In times of need, the Federal Reserve can counteract negative conditions in the economy as it did in the Great Financial Crisis and the economic challenges America faced during the Covid-19 Pandemic.  But then there comes a time for the market and economy to do the heavy lifting, removing responsibility from the central bank as conditions improve and normalize.  This transition is led by the Federal Reserve lifting overnight lending rates via the Federal Funds Rate.  America’s economy has been doing most of the lifting recently, but late last year expectations grew for the Fed to handle more of the weight. 

Entering 2024, market participants priced in six rate cuts this year according to data from the CME FedWatch Tool because a slowdown in inflation growth was largely expected.  As of this writing, these same participants expect less than half as many.  There are good reasons for their changing tune. While the rate of price increases has mostly slowed, it hasn’t reached the Fed’s target.  Further, just last Friday (March 29^th) Jerome Powell expressed a comfort with the economy’s growth rate at an event at the San Francisco Fed.  He then commented also that inflation data are tracking “pretty much in line with our expectations.”

But they have more to consider than inflation, right?  They do, including employment.  In just a bit, we’ll get another look at the labor market when the Bureau of Labor Statistics releases their Labor Situation Report, but so far there are only a few blemishes in that data lately.  Other evidence of the economy not needing further support was revealed on Monday of this week when the Institute for Supply Management released their manufacturing report; it pushed back into expansionary territory after 16 months of contractionary readings.

Seeing the Fed taking a load off the economy from higher interest rates seems less and less like the probable course.  The economy shows few signs of needing the help.  Our nation also has an election on the horizon, and the Fed has traditionally tried to steer clear of such events by remaining on pause in the months leading up to the vote.  The next Federal Open Market Committee meeting ends on Wednesday, May 1^st.  Then there are just three others before the election.  Baring an unforeseen hiccup of considerable magnitude, the central bank may just wait until the mid-fall or early winter.