Weekly Market Update

Is the Fed Behind the Curve?

With inflation easing, the Fed may shift its focus to slowing growth as unemployment rises above 4%, reaching levels unseen since 2017 outside the pandemic.

September 9, 2024 5 min read

Dane Smith

Head of North American Investment Strategy & Research

Throughout 2024, consumers have begged the same question: When will the Fed cut rates? That time is getting closer as the Fed’s tightening is starting to take a toll on the economy. The market believes the Fed is about to embark on its rate cutting journey, with 100 – 125 basis points of cuts priced in by the end of 2024.

The Federal Reserve’s multi-year restrictive policy has helped soften inflation, which is now down below 3%. As inflation is taming, more of the focus begins to shift towards concerns of slowing growth. Unemployment has crept above 4% as shown in the graph below. Outside of the pandemic, these are levels we have not seen since 2017.

One of the big surprises during the Fed’s record hiking cycle over the last couple of years has been the continued strength of the labor market. This kept consumers spending, and aided higher economic growth despite the restrictive rates. Now, as we start to see weakness in the labor market, it has gotten the attention of the Fed.

Back in 2022, the Fed was tardy in the fight against high inflation. It didn’t begin raising rates until CPI was around 8%! The difficulty for policymakers is that economic policy tends to act on a lag. The question remains that if they wait until they see trouble, is that already too late? Our base case continues to remain that we will avoid a recession; however, we see decreasing economic growth this year and next.

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