Markets Continue To Push for More From the Federal Reserve

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Markets have made themselves clear for a while: they want more rate cuts than what Federal Reserve (Fed) members seem to be willing to accept at this time. Many economic forecasters have moved decisively towards either a soft landing or a full-fledged reacceleration in economic growth. The Atlanta Fed GDPNow is estimating Q1 2024 GDP growth coming at 4.2%. At the same time, other economists are sounding the alarm that the Fed is risking sending the economy into a recession if it does not lower interest rates soon. One of the arguments being that the longer it keeps interest rates high the greater the probability that economic activity slows down and/or it goes straight into a recession.

Another argument is that annualized inflation rates over the last several months are already at the 2% target rate or below and that there is no longer a need to have interests so high, even though the Fed continues to argue that it is not annualized inflation rates for the last several months that guide monetary policy. Deafness is not only geared towards the Fed Chairman Jerome Powell’s commentaries. Markets have been selectively deaf for a while, lowering rates on their own, bringing the yield on 10-year Treasury’s from a high of 5% late last year to just about 4.0% today, which will breathe even more life into the housing market, one of the typical sectors the Fed targets when it conducts monetary policy. It seems that Chairman Powell’s press conference following the Federal Open Market Committee (FOMC) meeting on Wednesday, where he stated: “The committee needs greater confidence that inflation is moving towards the 2% target”, isn’t quite getting the attention that we think it deserves.

If you are confused, you are not alone

So, let’s recap and look at what we believe is happening. First, the last economic cycle, as we have argued many times before, was not a monetary cycle. Thus, those arguing that interest rates are too high fail to recognize that excessive lending did not happen so there hasn’t been a retrenchment in lending that would have affected economic growth. It is true that lending is weak today because of high interest rates but that hasn’t prevented the economy from growing strongly. There is one exception to this: credit card lending. But even credit card lending hasn’t seen a retrenchment and has continued to grow unabated even at these extremely high interest rates.

Total Lending Table

Credit Card Lending Table