Fed Rate Cuts Will Not Save the Economy

November 28, 2023

by Daniel Lacalle Mises.org

Market implied Fed Funds rate discount a string of cuts starting in January 2024 and culminating in a 4.492 percent in January 2025. These expectations are based on the perception that the Federal Reserve will achieve a soft landing and that inflation will drop rapidly. However, market participants who assume rate cuts will be bullish may be taking too much risk for the wrong reasons.

The messages from the Federal Reserve contradict the previously mentioned estimates. Powell continues to repeat that there is more likelihood of rate hikes than cuts and that the battle against inflation is not over.

Markets are not following monetary aggregates, and what they show is not good for the economy. According to the Federal Reserve, between September 2022 and September 2023, M1 declined from $20.281 trillion to $18.17 and M2 slumped from $21.52 trillion to $20.75.