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The Fed’s Alternative Flight Plan: Raising Rates
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The Fed’s Alternative Flight Plan: Raising Rates

Story Highlights

The Fed might not cut rates at all this year. Instead, there’s a growing chance they may actually raise rates yet again.

A growing number of voices question whether the Federal Reserve (The Fed) will actually raise rates rather than lower them when it next adjusts interest rate policy. The markets are beginning to adapt to this new perspective. Initially, the Fed’s next move was widely expected to be a rate cut, likely sometime this year. They had even predicted three rate cuts in 2024. However, recent economic data suggests that the Fed may need to consider an alternative plan.

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Is Recent Data Prompting a Reassessment of Fed Rate Policy?

The recent economic data suggests that the Fed may reconsider its analysis of rate policy. Initially, the Fed anticipated moderating inflation and a controlled economic slowdown, leading to a bias toward lowering rates after the last Federal Reserve Open Market Committee (FOMC) meeting.

However, a lot of events have unfolded since the last FOMC meeting. March unexpectedly saw U.S. retail sales jump, defying forecasts. This was followed by a string of stronger-than-expected economic indicators, including high U.S. inflation figures and a strong jobs report.

Initially, markets expected the Fed to start reducing rates in June, with a total of three cuts throughout 2024. Now, speculation is circulating that the Fed might refrain from cutting rates at all this year. Instead, there’s an increasing likelihood that they may opt to raise rates once more

The smoking gun for the Fed adjusting its bias toward higher rates lies in stubbornly high inflation. This adjustment would primarily aim to bring inflation down. The latest inflation release, the Consumer Price Index (CPI), revealed unexpectedly high figures, significantly surpassing the Fed’s target of 2% inflation.

Will the Fed Raise, Not Lower, Rates?

The Fed’s next meeting is scheduled for April 30 to May 1. Few market participants or strategists expect any shift in the Fed Funds target; it has remained unchanged at 5.25%-5.50% since July 2023. However, the combination of strong jobs data and persistent inflation is leading many analysts to believe the Fed may eventually hike rates, not lower them.

There was a significant caution from UBS Group AG strategists, Jonathan Pingle and Bhanu Baweja. The team highlighted the risk that if inflation doesn’t come down to the Fed’s target, monetary policy may have to return to rate hikes. This, of course, could trigger a downturn in stocks. The UBS strategists referred to this as a “no-landing scenario,” where further rate hikes could lead to a significant flattening of the U.S. Treasury curve and a potential 10%-15% decline in stock market values.

Final Thoughts

No one, not even the Fed, knows for sure what its next monetary policy move will be, including interest rate direction. The Fed has said it remains data-dependent, meaning it will let reports such as Unemployment and CPI dictate where the economy is and likely headed. A few years back, the Fed made the mistake of thinking that inflation was, in their words, “transitory.” Despite the numbers indicating persistent inflation, the Fed overrode the data with their own expectations.

Having learned its lesson, the Fed is now resolved to bring inflation down to 2%. Investors are encouraged not to fight the Fed and to follow the data themselves to get a sense of the next rate move.

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