Here’s what it would take for the Fed to start slashing interest rates in 2024

Interest
rate
cuts
don’t
happen
during
good
times,
something
important
for
markets
to
remember
amid
hotly
anticipated
easing
next
year
from
the
Federal
Reserve.

If
the
Fed
meets
market
expectations
and
starts
cutting
aggressively
in
2024,
it
likely
will
be
against
a
backdrop
of
a
sharply
slowing
economy
and
rising
unemployment,
which
in
turn
would
bring
lower
inflation.

Central
bank
policymakers,
however,
won’t
cut
for
the
sake
of
cutting.
There
will
have
to
be
a
compelling
reason
to
start
easing,
and
even
then
rate
decreases
are
likely
to
come
slowly
—
unless
something
breaks,
and
the
Fed
is
forced
into
more
aggressive
action.

“The
market
keeps
trying
to
front-run
these
rate
cuts,
only
to
be
disappointed,”
said
Kathy
Jones,
chief
fixed
income
strategist
at
Charles
Schwab.
“In
a
different
cycle,
when
inflation
hadn’t
spiked
so
much,
I
think
the
Fed
would
have
been
cutting
rates
already.
This
is
a
very
different
cycle.
There
is
going
to
be
much
more
caution
on
their
part.”

The
latest
market
rumble
over
the
prospect
of
rate
cuts
came
Tuesday
morning,
when
Fed
Governor
Christopher
Waller
said

he
could
envision
easing
policy
if
inflation
data
cooperates
over
the
next
three
to
five
months.

Never
mind
that
fellow
Governor
Michelle
Bowman,
just
minutes
later,
said
she
still
expects
rate
hikes
will
be
necessary.
The
market
instead
chose
to
hear
Waller
more
clearly,
perhaps
because
he
has
been
one
of
the
more
hawkish
Fed
officials
when
it
comes
to
monetary
policy,
while
Bowman
was
merely
reiterating
an
oft-stated
position.

“If
the
economy
moderates
at
all,
you
could
be
talking
about
a
real
disinflation
story,
and
I
think
that’s
what
Waller
would
be
getting
at,”
said
Joseph
LaVorgna,
chief
economist
at
SMBC
Nikko
Securities
America.
“If
the
real
fed
funds
rate
continues
to
go
higher,
as
I
expect
it
will,
then
you’d
want
to
offset
that
through
rate
cuts.
And
the
amount
of
rate
cuts
I
think
they’re
going
to
have
to
do
is
a
relatively
large
amount.”

LaVorgna,
the
chief
economist
at
the
National
Economic
Council
under
former
President
Donald
Trump,
said
he
thinks
the
Fed
could
have
to
cut
by
as
much
as
200
basis
points
next
year,
or
2
percentage
points.

Market
pricing
has
grown
more
aggressive
on
Fed
policy
easing,
with
fed
funds
futures
now
pointing
to
five
quarter-percentage-point
rate
cuts
next
year,
one
more
than
before
the
latest
speeches,

according
to
the
CME
Group.
Stocks

have
rallied
since
as
investors
prepare
for
lower
rates.

It
could
be
a
risky
bet
if
inflation
doesn’t
cooperate.

“The
Fed
doesn’t
want
to
take
its
foot
off
the
brake
too
early.
I
don’t
see
them
cutting
just
to
reach
some
theoretical
neutral
rate,”
said
Chris
Marangi,
co-chief
investment
officer
for
value
at
Gabelli
Funds.
“We
expect
some
economic
softness
next
year,
so
that
won’t
be
a
surprise.
But
a
significant
cut
in
rates
needs
to
be
preceded
by
significant
economic
weakness,
and
that’s
not
discounted
in
stock
prices
today.”

Fed
officials
at
their
meeting
in
two
weeks
will
update
their
economic
projections
over
the
next
several
years,
a
process
that
includes
revisions
to
the
so-called
“dot
plot”
of
individual
members’
expectations
for
interest
rates.

During
the

last
update,
in
September,
Federal
Open
Market
Committee
members
penciled
in
the
equivalent
of
two
quarter-point
cuts
next
year.
However,
that
was
predicated
on
another
rate
increase
in
2023
that
almost
certainly
is
not
happening,
judging
both
by
recent
Fed
commentary
and
market
expectations.

If
the
Fed
were
to
go
on
a
cutting
spree
next
year,
then,
it
would
almost
have
to
be
accompanied
by
pronounced
economic
weakness.
Virtually
all
previous
Fed
cutting
cycles
have
happened
during
or
around
recessions.

Hedge
fund
titan
Bill
Ackman
said
Tuesday
that
unless
the
Fed
starts
cutting,
it
will
in
fact
be
the
cause
of
a
sharp
downturn
that
it
then
would
have
to
address.

“We’re
betting
that
the
Federal
Reserve
is
going
to
have
to
cut
rates
more
quickly
than
people
expect,”
Ackman

said
in
an
upcoming
episode
of
“The
David
Rubenstein
Show:
Peer-to-Peer
Conversations,”
which
is
aired
by
Bloomberg.
“That’s
the
current
macro
bet
that
we
have
on.”

“I
think
there’s
a
real
risk
of
a
hard
landing
if
the
Fed
doesn’t
start
cutting
rates
pretty
soon,”
the
head
of
Pershing
Square
Capital
Management
added.

However,
even
some
of
the
historically
more
dovish
Fed
officials
aren’t
showing
their
hands
on
when
they
think
cuts
will
come.

Atlanta
Federal
Reserve
President
Raphael
Bostic,
an
FOMC
voter
next
year,

wrote
Wednesday
that
he
sees
pronounced
downward
trends
in
economic
activity
and
inflation.
Richmond
President
Thomas
Barkin
said
he
also
sees
slowing
but
added
that
he
remains
“skeptical”
that
inflation
will
come
down
to
the
Fed’s
2%
target
quickly
and
said
policymakers

need
to
keep
potential
rate
hikes
on
the
table.

“The
Fed
is
trying
to
slow
the
economy
down,
and
if
they
don’t
succeed
with
slowing
consumption
down
…
that
would
then
imply
that
maybe
the
market
should
be
pricing
that
rates
are
going
to
be
higher
for
longer
than
what
futures
are
pricing
at
the
moment,”
Tosten
Slok,
chief
economist
at
Apollo
Global
Management,
told
CNBC
on
Tuesday.
“Maybe
we
need
to
get
all
the
way
into
Q3
before
the
Fed
will
begin
cutting.”

Indeed,
Gary
Cohn,
former
director
of
the
NEC
under
Trump
and
former
chief
operating
officer
at
Goldman
Sachs,
said
the
kind
of
economic
weakness
that
would
precipitate
rate
cuts
is
unlikely,
at
least
in
the
first
part
of
2024.
Consequently,
the
Fed
could
lag
its
global
counterparts
when
it
comes
to
relaxing
the
fight
against
inflation
and
not
start
cutting
until
“maybe”
the
third
quarter,
he
said.

“You
don’t
want
to
be
early
to
leave
when
you’re
the
last
one
to
come
to
the
party,”
Cohn

told
CNBC’s
Dan
Murphy
on
Wednesday
at
the
Abu
Dhabi
Finance
Week
conference.
“You
have
to
be
the
last
one
to
leave
the
party,
so
the
Fed
is
going
to
be
the
last
one
to
leave
this
party.”