Financial Contagion vs. Inflation: What the Fed’s Next Move Means for the U.S. Economy

Written in partnership with Kavan Choski

Many expect the Fed to begin rate cuts in 2024 after two years of continued constricting rate hikes and pauses. As the Federal Reserve grapples with the delicate balance of managing interest rates amidst a fluctuating economic indicators, investors and policymakers are closely scrutinizing every move. The consensus is that we are still on the path to seeing three rate cuts this year, but the likelihood of that continues to dwindle at each FOMC meeting.

Recent trends indicate a shift in traditional expectations surrounding Fed interest rates. Despite persistent inflationary pressures, buoyant job numbers, and robust GDP growth, there’s a growing sentiment that the Federal Reserve might opt for fewer rate cuts this year. Throughout the past year, we have seen a difference of opinion internally amongst the Fed, but we are starting to see these differences come to light. We’re starting to see many, such as Minneapolis Fed President Neel Kashkari, follow the narrative of suggesting no rate cuts this year while many members, like Chair Jerome Powell, argue that rate cuts are still on the table despite the upcoming election.

Given the current circumstances and numbers the Fed is working from, there is a reality where no rate cuts are happening this year. The likelihood of this happening has strong potential, but there is still a 50/50 chance we will see rate cuts in 2024. If the Fed moves forward with rate cuts, it would be wise to begin making cuts months before the presidential election cycle is in full swing. It is unlikely that Chairman Powell will make rate cuts one month before the election. Conversations about the Fed, interest rates, and inflation will no doubt play a central role in both candidates’ campaigns, and it would not be wise to be caught in the crossfire and provide both parties with ammo to either boost themselves or tear the other down.

Despite various factors seemingly stacked against the Fed, there is no pressure for Chairman Powell to make any decisions. For now, continuing to impose pauses rather than make a change to cuts allows the Fed some leeway in its decision-making process. It also allows the Fed to see how their previous hikes are catching up and impacting the present moment. However, we will likely see a financial contagion take over if they continue to sit on pauses and don’t act at the right time to begin changing rate cuts. Only over a year ago, we saw Silicon Valley Bank’s collapse and the turmoil it created. While that failure may seem long ago, it should serve as a reminder that we could see similar events take place soon and that our financial systems are incredibly fragile. Should this financial contagion become a reality, it could necessitate unforeseen interventions from the Federal Reserve and potentially alter the trajectory of interest rates.

In navigating this landscape of uncertainty, it’s imperative to maintain a balanced perspective. While the prevailing consensus suggests a course of action, deviations from the expected path are common. The interplay of economic data, political dynamics, and unforeseen events underscores the complexity of the Federal Reserve’s mandate.

As we chart a course forward, we must remain vigilant and adaptable. While forecasts and prognostications offer valuable insights, they must be tempered with an acknowledgment of the inherent uncertainty that defines economic policymaking. In the ever-evolving saga of Fed interest rates, only time will reveal the true path forward.

Author & Expert Source: Kavan Choksi, a successful investor, business management and wealth consultant

Bio: Kavan Choksi is a successful investor, business management and wealth consultant at KC Consulting. He works strategically with companies across fast-moving consumer goods, retail and luxury markets – leveraging his vast experience to help clients turnaround and revitalize their business. With expertise in economics and finance, Kavan has developed a passion for investing over the years and enjoys helping others do more with their money. He provides thoughtful commentary to publications such as Fox Business, Business Insider, Financial Express, Forbes Advisor, and The Epoch Times. Kavan is also a regular contributor for NASDAQ, where he shares his expert insights on what’s moving markets and the global economy.

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