Will the Fed Lower Interest Rates in 2024 – Likely Here’s why and it is probably not what you would expect

Will the Fed Lower Interest Rates in 2024 – Likely
Here’s why and it is probably not what you would expect

In 1965 President Lyndon Johnson had overseen “The Great Society” legislation. It included Medicare, Civil Rights, the War on Poverty, and the Vietnam War. Johnson was recovering from gallbladder surgery at his ranch in Texas when William McChesney Martin, as the head of the Federal Reserve announced on Friday December 3, 1965, that the Fed was going to raise discount interest rate to 4.5% to fight inflation. Johnson was livid. He “invited” the Fed chairman to fly immediately to the ranch in Texas. Martin was there on December 6.
Johnson was a tall man, and as he showed Martin around the ranch, he suddenly grabbed the Federal Reserve Chairman by his shirt and pushed him up against a wall.
“You went ahead and did something that you knew I disapproved of, that can affect my entire team here,” Johnson said. “You took advantage of me and I’m not going to forget it, because here I am, a sick man. You’ve got me into a position where you can run a rapier into me and you’ve run it.
“Martin, my boys are dying in Vietnam, and you won’t print the money I need.”1
And with that, the Fed quit raising the discount rate even though inflation continued upward and, in fact, the Fed would some months later lower the discount rate.
The Federal Reserve is supposedly independent of politics. Supposedly.
That is not the only time that a President put pressure on the Fed Chairman. In 2018 President Trump was, at least publicly, agitated that the Fed under Jerome Powell was deleveraging the Fed balance sheet. Trump speculated just before Christmas about firing Powell. That day the stock market tumbled down for the worst Christmas eve ever. Powell claimed independence but announced that the Fed would discontinue the deleveraging. The stock market had one of its best days ever.
That is the historical context of why I believe we will see the Federal Reserve lower interest rates beginning in the spring of 2024. Inflation will have come down some but not to the 2% target. Next year is an election year. President Biden’s poll numbers are sagging. Polls show the public is not enamored with Bidenomics.
In every recent reelection campaign, the incumbent President has initiated some sort of stimulus. For George H. W. Bush, it was a tax cut. For Barak Obama it was discontinuing payroll withholding for 2012. For Donald Trump it was the 2017 tax cut. Wouldn’t Biden be in favor of lowering interest rates to stimulate the economy and push up the stock market? Unlike the public display of Lyndon Johnson pushing William McChesney Martin, the push on Powell will probably happen behind closed doors. We will only know when the rate announcement is made.
It is possible those “discussions” may already be happening. The Fed is holding rates steady for now.
Lowering interest rates may stimulate the stock market and economy, but will not deal with the bigger issue of inflation.
We have been saying since 2016 inflation was coming and the highest probable outcome was a decades long inflationary period which could see even double-digit inflation. Inflation will probably be somewhat benign in 2024. Over the longer run the biggest risk is a high inflationary period. We would hope not. But we intend to plan for the worst and hope for the best. The 2022-2023 period was a difficult learning experience. But the lessons have hopefully been learned.

Notes:

“A President at War With His Fed Chief, 5 Decades Before Trump”, NY Times, June 13, 2017.