Powell and The Fed Will Blink First
The Fed will be slow to ease monetary policy just as it was slow to tighten. While the Fed has already eased its QT effort, it may not ease rates for months.
The Central Bank is concerned about price inflation, although the Fed will never admit that its inflating the money supply from Jan 2020 - April 2022 was the cause of price inflation.
In addition, the Fed will not want to be viewed as political by easing rates ahead of November’s General Election.
The election and not wanting to be viewed as political will hamstring the Fed’s ability to lower rates this fall. As a result, the Fed may announce larger rate cuts when it finally announces cuts than it otherwise would have had 2024 not been an election year.
I don’t believe outgoing FOMC member Loretta Mester when she talks about a long-term Fed Funds Rate of 3% nor do I believe FOMC projections for a 2.3-2.5% long-term Fed Funds Rate.
Why? Because so long as the Federal Government runs $1 Trillion-plus fiscal deficits on an existing debt load of $35 Trillion, the United States simply will not be able to afford a 2.5% or 3.0% Fed Funds Rate.
Further, I do not see the Federal Government finding fiscal discipline until investors force much higher yields upon the Treasury market. Once that happens, Congress and the White House will have no choice but to slow spending.
I feel so strongly about the Fed moving to lower rates that I believe the winner of the 2024 Election will remove Powell should the Fed not adopt a fully dovish monetary policy position. Mark my words. The Fed is not driving the bus and will blink before the fiscal side of the house blinks.