Broker Check
Will the Fed Cut Rates? Don't Be Blinded by the Hype

Will the Fed Cut Rates? Don't Be Blinded by the Hype

April 09, 2024

Remember how everyone was predicting a recession for the past two years? Well, it never happened. Now, something similar might be happening with the job market and interest rate expectations.

Many experts think there will be fewer job openings and more unemployment soon. That would likely lead the Federal Reserve (the Fed) to lower interest rates, which is what they control. Right now, most traders (based on a tool called the CME Fedwatch Tool) think there's a good chance (56%) that the Fed will cut rates in June.

But hold on! What if these predictions are wrong, just like the recession predictions?

Think of it like a solar eclipse. Suddenly, everything gets dark, but it's only temporary. In the same way, the focus on these predictions might be hiding a brighter picture.

Here's why:

  • In the past, the Fed usually lowered rates quickly after stopping hikes. But those times often involved big financial problems that made it harder for businesses to borrow money. That's the real reason the Fed lowered rates back then.
  • Right now, things look different. There aren't any major financial problems on the horizon. The Fed has also gotten better at preventing these problems from happening in the first place. Remember what they did in March of 2023? They helped banks get money when they needed it, possibly preventing the recession most economists were waiting for!
  • Even better, the economy overall seems to be doing well. Businesses are growing, there are plenty of jobs, and inflation (rising prices) is slowing down. Recent reports show lots of job openings are still available, and the influx of immigrants in the last couple of years may help keep wage growth under control.

The key takeaway? Economic predictions are tricky, just like predicting weather patterns for an eclipse (imagine traveling 4 hours to see an eclipse and it rains all afternoon?). The current worries about the job market might be a bit overblown. With a strong job market and slowing wage growth, the Fed might not need to cut rates so soon after all.

This temporary "eclipse" of economic clarity can actually be helpful! It reminds us not to rely on past patterns alone. By focusing on current data and understanding the bigger picture, we can make smarter decisions about our investments, even when things seem uncertain.

 

Best Regards,

 

Ricardo Ferreira

Founding Partner, Portfolio Manager




The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. Any securities mentioned here are for informational purposes only and are not recommendations to buy or sell any security.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.