No Rate Cuts This Year. Maybe a Couple of Hikes.

The Federal Reserve’s Open Market Committee is holding their March meeting today. At the end of last year, most investors believed that inflation was continuing to fall, and the Fed would cut interest rates six times in 2024. Based on the most recent data the Fed will not cut interest rates at all this year and may indeed raise them once or twice.

In June 2022, the Fed finally remembered that one of the goals of Monetary Policy is to ensure price stability. From the time inflation started to rise in January of 2021 until June 2022, the Fed followed a shockingly irresponsible Monetary Policy and completely ignored price stability.
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With continued huge Government spending deficits and with inflated wages, there is little reason to believe that inflation will fall. In fact, with a core rate of 4%, rising energy prices could raise the inflation rate significantly.
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During that time, the Fed kept interest rates near zero and they rapidly increased the money supply by purchasing $120 billion in government bonds monthly. This contributed significantly to the rapid rise in prices.

In December 2020, the inflation rate was 1.4%. In 2021, because the Federal Government incurred a nearly $3 trillion spending deficit and because the Fed followed the shockingly irresponsible Monetary Policy, the inflation rate ballooned to 9.1%, a 40-year high.

Finally, in June 2022 the Fed took action to bring the inflation rate down. During the next twelve months, the Federal Funds Rate went from near zero to more than 5.25%. That helped to bring the inflation rate down to nearly 3%. Then the Fed stopped raising rates.

That was a big mistake. The Fed Funds Rate should have reached 6% to permanently get rid of the inflation problem. Since September 2023 the Federal Funds rate has been held constant at about 5.25%. The inflation rate hovered in the 3% to 3.5% range as measured by the most accurate measure of consumer inflation, the Consumer Price Index.

Late last fall, nearly all investors believed that inflation was continuing to fall so the Fed could start reducing interest rates. Unfortunately, there will be no interest rate cuts this year. Why?

Simply because we have not tamed the inflation problem. Inflation will stay at least in the 3% to 3.5% range for the entire year and may go higher. The core inflation rate which holds food and energy prices constant continues to be about 4%.

With continued huge Government spending deficits and with inflated wages, there is little reason to believe that inflation will fall. In fact, with a core rate of 4%, rising energy prices could raise the inflation rate significantly.

In the CPI, energy accounts for nearly 30%. Wildly fluctuating energy prices partially explain why the inflation rate skyrocketed to 9.1%. It also partially explains why the inflation rate fell to 3.1% last November. But in the last month, oil prices have been rising. They are likely to rise further as the fighting in the Middle East continues.

That means if the deficit spending and the inflated wages continue to put upward pressure on the core inflation and if energy prices continue to increase, we could see a return to inflation in the 4% to 5% range. That would mean no interest rate cuts by the Fed this year and, as long as the economy keeps growing, perhaps one or two interest rate increases.

The Fed made terrible mistakes handling what they called “transitory” inflation. They made another mistake in September 2023 when they halted their interest rate increases. Let’s hope they don’t make more mistakes by succumbing to political pressure and reduce intertest rates too soon.

The Federal Reserve was established as a Quasi-public institution meaning they are not bound to follow what any government official wants. The Fed is supposed to be independent and not political.

But raising rates in 2018 when there was absolutely no signs of inflation and when tax cuts were set to increase economic growth, makes one wonder why the Fed took that action. Keeping interest rates near zero and buying about half of the bonds from government deficit spending in 2021seems odd, especially when the inflation rate was increasing rapidly.

The Fed will not cut interest rates this month or in May or in June. By then gas prices may be rising, and the inflation problem worsening, Meanwhile the economy will continue to grow. Does that mean a rate increase in September? Will the Fed be apolitical?

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