Can the Fed really cut six times?

Financial markets have fully embraced the fantasy of an immaculate macroeconomic landing. Fed funds futures are aggressively pricing in up to six 25-basis-point rate cuts for 2024, projecting a rapid descent in the policy rate from 5.4 per cent to below 4.0 per cent. Yet examining the Federal Reserve's historical reaction function exposes a glaring logical contradiction.

The Asymmetric Reality

Central banks historically cut rates six times in a calendar year only during severe economic contractions, acute financial panics, or banking system collapses. If the US economy delivers 2.5 per cent GDP growth and the unemployment rate lingers near 3.8 per cent, the Fed has zero institutional incentive to ease aggressively. Lowering rates into economic vigor risks rekindling inflation animal spirits and reversing months of progress.

The market’s expectation of six rate cuts while simultaneously anticipating robust economic growth is a macroeconomic fairy tale that will inevitably collide with central bank caution.