outperformed expectations in 2023, and economic activity in the first quarter of 2024 signals continued solid economic growth. That backdrop coupled with a very strong stock market and continued elevated wage
Fed Chairman Jerome Powell in his Wednesday testimony before the House Financial Services Committee explained that the first rate cuts, which were expected this month, will come later than anticipated. The marketthe first cut coming in June or July. Because economic growth is more resilient than expected and because wage inflation remains somewhat elevated, the Fed will likely only reduce rates by about 0.5% from the current level of around 5.38%. The market is too optimistic. Itrate cuts of 0.
With interest rates at 5.38%, monetary policy is restrictive. Policy is reducing economic growth. To ensure that nothing breaks in the economy, the Fed will begin the slow process of reducing rates sometime this summer. It is important to remember that monetary policy affects the economy with a long and variable lag. Even after one or two rate cuts of 0.25% each, policy will be restrictive with the effects of slower growth and lower inflation.
Over the coming months, more data will confirm the economy is slowing and that inflation is continuing to fall. The manufacturing sector hasthis week showing that low-income households are being squeezed hard by elevated rates for vehicle loans and by rising rates on credit card debt. Delinquencies and defaults are rising.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes