With gold reaching all-time highs and the Dow approaching similar records, many are sharing their opinions on the reasons behind these market movements. Following the Dow’s closure at its highest level since January 2022, Reuters attempted to explain that investors:
… viewed cooling inflation data as a harbinger of easing Federal Reserve monetary policy.
Yahoo Finance makes no apologies for the central bank’s intervention, citing:
… Federal Reserve’s anti-inflation interest rate hikes as having their desired impact. With a soft landing for the economy looking more likely, traders have been betting on a Fed policy shift to cut rates.
Describing what the “soft landing” landing would look like is open to interpretation, since it’s not an actual economic term and lacks any formal definition, theory, or measurable criteria. Rather, it’s just an idea the Fed uses to describe what sounds like a relatively good period after rate hikes stop, in which minimal or no recession follows. In this future, inflation indexes would reflect favorable data, according to the Fed, and the stock market should moderately rise.
Even if such a period is achieved, it would prompt the Fed to cut rates, expecting a rise in prices, leading to the continuous cycle of rate adjustments. This management would continue ad infinitum, with the why or how this is best for the economy hardly being explained in simple terms.
Despite some news outlets expressing optimism about future rate hikes, CNBC quoted a portfolio manager earlier in the week who held a less favorable view of the Fed, stating:
The Federal Reserve needs to cut interest rates at least five times next year to avoid tipping the U.S. economy into a recession…
How anyone could substantiate the claim that “at least five” interest rate cuts will be needed to avoid a recession is anyone’s guess.
Predictions about avoiding a recession or a soft landing are noteworthy, as anyone who can recall living through the last few times the Fed raised rates might also recall the recession which followed. To make further sense of what happened, and what will likely come again, one should look into the changes to the Fed’s balance sheet, changes to the money supply, as well as the yield curve, then consider how they relate to the Austrian Business Cycle.
Therefore, when pundits express sentiments such as:
… the Fed was behind the curve on lowering rates…
We need to push back, as the issue extends beyond determining the correct rate at the perfect time and instead speaks of a much deeper problem, the very existence of the Fed. What has and will happen is not mere policy error, fundamentally, the existence of the policy itself is the error.
If there are rate cuts in 2024, will it be due to an economy and stock market that are both in shambles, or will it be a result of the soft landing taking effect, with inflation returning to the Fed’s target, and everything going according to plan?
