When Will the Fed Lower Rates – Podcast Episode 471
1. The Federal Reserve raised the federal funds rate from near zero in March 2022 to between 5.25% and 5.50% by July 2023, and as of February 2024, they are not in a hurry to lower rates.
2. It typically takes six to eighteen months for interest rate changes to impact the economy, suggesting it’s too soon to see the full effects of the last rate increase.
3. The period of low interest rates from 2008 through 2022 was an exception, and the current higher rates are a return to what may be considered more normal levels.
4. The Federal Reserve is cautious about lowering rates too soon, as doing so could stimulate the economy unnecessarily and potentially reignite inflation.
5. While GDP growth has been reported, it’s fueled by debt rather than output, with the fourth quarter of 2023 showing a $300 billion increase in GDP but a $500 billion increase in the budget deficit, indicating for every dollar of growth, there’s about $1.50 in new debt.
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Transcript: When Will the Fed Lower Rates – Podcast Episode 471
Welcome back to the podcast. This is episode number four hundred and seventy-one. I am Tom Mullooly.
The question that we’re getting the most this week—and we’re recording this in February of 2024 —is: “Why hasn’t the Federal Reserve cut interest rates yet?”
I think there’s a good reason for it. Let’s talk about this.
But first, we have to back up and just walk down memory lane about a few things that happened over the last few years. In a fourteen-month period, from March of 2022 through July of 2023, the Federal Reserve raised interest rates massively.
When the Fed talks about setting a policy rate for short-term interest rates for what they call “fed funds,” they give it a range. They never say the rate is going to be exactly this. They give you a range.
So, when they were starting to raise rates, the federal funds rate at the time in March of 2022 —not that long ago—was from zero percent to a quarter, twenty-five basis points. By July of 2023, the federal funds rate—and it’s still the same today—is now 5.25% to 5.50%.
I just want to remind our listeners that the federal funds rate was raised last in July of 2023. As of the recording that we’re making today in February 2024, that was seven months ago. It normally takes six months – to as long as eighteen months – to see interest rate changes flow through to the economy.
So, for folks to ask the Fed to be lowering rates now doesn’t really seem to make a lot of sense. They just finished raising rates. Why are they going to be in such a hurry to lower rates?
And let’s talk about lowering rates. We’re not going to see the federal funds rate back at zero, or twenty-five basis, points anytime soon. And I don’t know if we will ever see interest rates at those levels again.
What I think folks need to adjust to is the idea that interest rate policy from 2008 through 2022, when interest rates for most of that time were down around zero, between zero and one percent, was an exception, not the rule. What we saw in the previous fifteen years was a fluke, a real exception, and we need to get used to — or readjust to the idea — that we’re going to be seeing interest rates that are not zero anymore.
Listeners to previous episodes know because I’ve said it many times that many economists—and maybe all economists—and a lot of market strategists have said for years that if the Federal Reserve ever raised rates that quickly, in a fourteen-month period we went from essentially zero to almost five and a half percent, it’s for two reasons.
The first reason is it’s because they have some catching up to do. And it’s true. They did have a lot of catching up to do because inflation was out of control.
The second reason or the second point behind that is if the Fed ever raised rates that quickly, that aggressively, the economy would collapse. The economy would crash. We’d see a lot of problems.
That did not happen. But understand that the Fed is not in a hurry to lower rates. Really, they’re in the driver’s seat right now. We’re getting report after report that shows inflation is cooling. And GDP, which shows the gross domestic product — that’s our productivity, that’s our output—is growing.
When the Fed is lowering rates, what they’re doing is they’re trying to stimulate the economy.
There is no need to stimulate an economy that’s already growing.
The fear now that the Federal Reserve has is they’re worried that if they say, “Okay, we won the game. Inflation seems to be cooling off and we don’t have to worry about it anymore,” what’s happened in decades past is when they take their foot off the gas when it comes to interest rates, inflation tends to reaccelerate and come back.
If the Fed were to start cutting rates immediately, we’d see additional growth stimulation in the economy; it’s very likely that we would see inflation tick higher.
And then we’ve got another problem. Now the Fed is going to have to reverse course and start raising rates again. With short-term rates for the Federal Reserve, for the federal funds rate, now at over five percent, the Fed has plenty of room to maneuver.
I don’t see them drastically lowering rates unless we kind of see some kind of calamity, some crisis. A lot of people like to overuse the term “crisis.” We’re talking about a real emergency. And certainly, at least we’ve seen in years past, the Fed will try to stay out of the picture when it comes to election year cycles, and we’re in one right now.
I want to shift gears for a moment to talk about GDP and the gross domestic product. Because a lot of people, there are plenty of folks in our industry who equate GDP as the growth in the economy. It’s not exactly growth in the economy. Let’s talk about this.
You’ll see report after report that the economy is in great shape. But yet, when you talk to the man on the street, they have a different story to tell.
It’s a little chilling to see that real income is down. Most people feel like they’ve downgraded their living standards over the last few years. But still, there hasn’t been a declaration that there’s been some kind of recession.
We know that the unemployment reports that come out on a monthly basis are somewhat flawed in the sense that they don’t account for people who drop out of the labor force, or they also don’t account for people who hold multiple jobs, multiple part-time jobs.
There was a joke twenty years ago that people said, “Oh, you know, George Bush created two million jobs this year, and I have three of them.”
Technically, unemployment remains low; we’re under four percent. Historically, those are great numbers.
But has it really changed your situation? I don’t know.
When you look at indicators like gross domestic product, GDP, it’s not necessarily a measure of your standard of living, or really even economic growth.
Gross domestic product measures output, stuff that goes on in dollar terms, whether it’s really efficient or not.
So we had some GDP numbers that came in for the fourth quarter of 2023 recently, and the numbers were good. They were way better than what the street was expecting. The problem is that what most people don’t associate with the GDP output numbers—productivity.
But what a lot of people don’t equate is that in the past twelve months, the federal deficit increased by $1.3 trillion dollars. Yet our GDP, our gross domestic product, increased by about half of that, $600 billion dollars.
So we are creating a lot more debt, and we’re not seeing that flow through in the economy into real numbers. Put it another way, the fourth quarter gross domestic product grew by over $300 billion dollars. GDP for the United States of America is now approaching $28 trillion dollars. The problem is that our budget deficit rose by a substantial amount.
We now have a (forecasted quarterly) budget deficit of over $500 billion dollars.
Put it another way, for every dollar in growth, it cost us about a buck fifty in new debt. }|
That is not great.
We’re getting a different kind of growth than I think people are used to. This labor force participation rate, which is now 62.5 percent, means a little more than sixty-two percent of people who could work, are working. And they show the employment population ratio at 60.2 percent. Both are little changed.
So what we’re seeing now is that we’re getting a lot of growth in GDP, most of it is being fueled by debt, not necessarily by output.
What does this mean for the stock market and Wall Street and your investments?
Well, right now, most companies that are reporting earnings at this time of the year are reporting good earnings. We still get the occasional surprise, negative surprise in earnings. They always seem to be the exception.
Usually, companies, we usually see a number somewhere in the vicinity of 70+ percent of companies reporting higher earnings than expected. So most companies are reporting good earnings. And even better, most companies are forecasting continued good earnings growth.
Going forward, markets, I think a lot of people tend to look in the rearview mirror and say, “Well, their earnings were good, so the stock should go up.”
But sometimes stocks go down – even on good earnings, because they weren’t as good as expected. Or the forecast for the next quarter (or the next year) was not so bright.
Understand that markets move today based on the direction and the perception of two things.
Number one, what are the earnings trends?
Yes, you can have a good quarter that basically tells your investors what happened over the last ninety days. But if you’re giving a forecast of lackluster earnings or low earnings growth — or negative earnings growth, that’s not a good sign.
So markets move today based on two things:
The perception that tomorrow will be better and earnings will continue to climb.
And the second thing that markets move on is the trend in interest rates.
It’s not necessarily where interest rates are today; it’s where people think interest rates are going to be tomorrow.
And these two things drive markets more than anything else that’s out there.
Right now, the Fed has telegraphed to folks (who are paying attention) they feel that they’re done raising interest rates. But they don’t want to be in a hurry to lower interest rates.
I anticipate that we may see one or two interest rate cuts this year, but the timing is always going to be off. We’ve got an election in November; we’ve got the Fed that also has said that they want to see continued decreases in inflation in the system. So they’re running into a narrow window where they’ll be able to cut rates and stay out of the election news (or noise) that’s out there.
So I don’t really know what people are thinking when they forecast 3,4 or 5 interest rate cuts. I don’t see it.
When you have earnings that are going to be flat or down, or interest rates that are going to go up in the future, you’re going headfirst into the wind.
When you have earnings that are trending up in the future and interest rates that are trending lower in the future, you’re getting a tailwind when it comes to your investments.
A lot of technical talk today about different things that influence markets. It’s not a day-to-day thing. You need to step back and look at the bigger picture where things are going.
That’s going to wrap up episode four hundred and seventy-one of the Mullooly Asset Podcast. Thanks as always for tuning in.
Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.
