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CAPITAL IDEAS: The Federal Reserve should not cut interest rates this year

I hold a correlative unpopular opinion: The stock market would continue to do well in 2024 even if the Fed did not cut rates.

Investors don’t want to hear that the Fed won’t cut interest rates in 2024—not that investors would believe it anyway.

For months, this column has pointed out that investors have been predicting as many as six quarter-percentage-point cuts in the federal funds rate this year. For the same time, I have argued that expecting so many cuts was absurd. Investor expectations of the number of rate cuts have become more realistic recently, with about half as many predicted.

To be clear, I fully expect the Fed to cut rates this year—if only because so much pressure is on them to do so. The consensus expects the first cut to occur in May or June 2024. However, I hold the unpopular opinion that the Fed should not cut rates at all this year.

I hold a correlative unpopular opinion: The stock market would continue to do well in 2024 even if the Fed did not cut rates.

Why shouldn’t the Fed cut interest rates?

The Federal Reserve raised its federal funds rate from essentially zero to a range of 5.25 to 5.5 percent to drive down a decades-high inflation rate. The inflation rate has come down but remains too elevated to cut interest rates. Also, the relentless pace of the jobs market threatens to reignite inflation.

The Fed has said, and I agree, that there is space to cut interest rates once the trajectory of inflation suggests that it is on a sustainable path to its target rate of two percent. Inflation is currently on that path. However, “sustainable” does not mean “without risk.” It would be imprudent of the Fed to cut rates if the risk of stoking inflation was not low. However, strength in the labor market heightens that hazard. More than 2.7 million jobs have been created in the previous 12 months.

Chart courtesy of the U.S. Bureau of Labor Statistics.

Over those 12 months, real (i.e., inflation-adjusted) hourly earnings increased 1.1 percent. Real median household income grew 2.1 percent from 2018 through 2022. Whether the spread of nominal earnings over the inflation rate should be higher or lower can be debated. What is not debatable is that the cocktail of more jobs at higher wages does nothing to suppress inflation.

The latest Job Openings and Labor Turnover Survey (JOLTS) further explains why the Fed should remain cautious about inflation and hold off any interest rate cuts this year. U.S. companies desire to hire more people than there are available workers.

The ratio of job openings to unemployed workers was 1.4 in January 2024 (the most recent survey). This ratio is down sharply from the all-time high of 2.0 in July 2022. However, it is still higher than immediately before the pandemic, which was 1.2 in February 2020.

Chart and data courtesy of DataTrek.

From December 2000 through 2017, it was the norm to have more unemployed Americans than jobs available (an average ratio of 0.5). Then the labor market heated up, and the opposite happened from March 2018 to February 2020. Now that we are (hopefully) on the other side of the pandemic, the labor market remains heated with few signs of material slowing. Inflation may be on a sustainable path to the Fed’s two percent target rate, but the risks of derailing that trajectory are too high to cut rates this year.

Can the stock market withstand interest rates remaining higher for longer?

Even if the Fed didn’t cut rates this year, there would still be a good stock market story. Labor demand might pressure inflation, but job creation is also a positive scenario for corporate profits. Corporate profits lift stock prices.

Following several new highs in the S&P 500 in 2024, the likelihood of a correction is growing. If you want to know whether we will see new highs in 2025, it is important to understand why this year’s highs are being achieved in the first place.

First, investors expect rate cuts this year, which has lifted stock prices because lower interest rates mean stock prices can trade at higher multiples. Without rate cuts in 2024, there would likely be a significant stock market correction. However, investors would then expect cuts in 2025—and most likely get them.

Second, the Fed is expected to cut rates because of improved inflation and not economic deterioration.

Third, lower interest rates expand corporate profit margins. Analysts are projecting earnings growth of 11.0 percent and 13.2 percent for 2024 and 2025, respectively. Those projections would shrink in the absence of rate cuts this year but not threaten them materially. (Analysts are an optimistic bunch; projections almost always get reduced as the prediction dates approach. The point is a few cuts put off until 2025 wouldn’t be the main culprit of any standard reduction of projections.)

That is a nice set of incremental positives that should bolster the stock market in 2024 even if the Fed doesn’t cut and even if it suffers a correction.


Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.

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