Is the US economy too strong? Why some economists are now saying there will be no rate cuts this year

CNN – New York (CNN) – 2024 should be the year when consumers could breathe again.

After more than 20 months of inflation and higher borrowing costs, investors, economists and eventually Federal Reserve officials said they expected the economy to slow this year, which would finally allow the central bank to cut interest rates.

But expectations of a U-turn by the Fed continue to be pushed back. While the market initially expected six rate cuts this year starting in March, that is now off the table.

“I don't think it's likely that the committee will reach a level of confidence by the March meeting to identify March as the right time to do this,” Fed Chairman Jerome Powell said at the Fed's January meeting of possible options Cuts.

Now some economists believe the Fed won't cut interest rates at all this year.

“The economy is not slowing and some underlying inflation indicators are increasing,” Torsten Slok, chief economist at Apollo Global Management, said in a note to investors on Friday.

“The Fed will not cut interest rates this year and interest rates will remain higher for longer,” he added.

Richmond Federal Reserve President Tom Barkin reiterated the idea that the central bank may not cut interest rates this year.

“We’ll see,” Barkin said in an interview with CNBC on Friday morning. “I'm still confident that inflation will come down, and if inflation normalizes then that speaks to why you want to normalize interest rates, but for me it starts with inflation.”

Americans are struggling with higher prices due to inflation, especially for essentials like rent, groceries and gasoline. Food prices rose 0.4% between December and January, the highest monthly rate in a year.

“Food prices continued to rise, and that's a real pain point,” Robert Frick, corporate economist at Navy Federal Credit Union, told CNN.

In some ways, the expectation of rate cuts by the Fed undermined its efforts to actually lower interest rates. That's because U.S. growth expectations for 2024 saw a jump as investors and economists factored in an easing of financial conditions.

Economists at S&P 500 Global Ratings now expect U.S. real gross domestic product to grow 2.4% in 2024, compared with their forecast of 1.5% in November. The labor market remains extremely resilient, unemployment is at historic lows and wage inflation remains high.

However, an expanding economy can also accelerate the inflation rate. Recent data shows the Fed's preferred inflation indicator was still above the central bank's target in January.

There are further signs that inflation is not easing as the Fed predicted. Small businesses are expecting price increases soon, according to a recent survey from the National Federation of Independent Business. According to recent data, prices paid by manufacturing and service companies are also increasing.

“The bottom line is that the Fed will spend most of 2024 fighting inflation,” Slok said. This means that interest rates will remain high.

However, according to the CME FedWatch tool, about half of investors expect a rate cut at the Fed's June meeting. The vast majority of investors expect a cut by July.

Investors will be watching Powell closely for clues about expected rate cuts next week when he testifies before the House Financial Services Committee and the Senate Banking Committee on Wednesday and Thursday, respectively.

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