For months, many economists have anticipated some sort of economic slowdown as the Federal Reserve keeps interest rates above 5% to cool off inflation. But economic data, including a strong jobs report last week, now have one expert outlining a different risk: reacceleration.
Callum Thomas, the head of research and founder of Top Down Charts, shared a post on X, formerly known as Twitter, explaining how reacceleration in the economy could cause the Fed to raise interest rates instead of cutting them.
This could be problematic for stocks, as the expectation has been for there to be multiple rate cuts in 2024 and those cuts are at least somewhat priced in, according to Thomas.
Typically, the Federal Reserve cuts interest rates if economic data is slowing. Thomas argued that if economic data continued to indicate a hot economy, like an increase in the Purchasing Managers’ Index (PMI), then the Federal Reserve might consider raising interest rates.
“Picture this: growth reaccelerates, capacity still tight, inflation still elevated, commodity prices go up..... inflation goes up,” Thomas wrote in his post. “So reacceleration risk also means (inflation) resurgence risk. Resurgence risk = no rate cuts, maybe hikes, higher bond yields, 1970’s redux fear.”
CME’s FedWatch tool, which predicts the odds of rate hikes or cuts, now indicated just a 19.5% chance the Fed would cut rates by 25 basis points at its next meeting in March. A month ago, the tool indicated a 64% chance the Fed would cut in March.
But, because labor and economic data remained strong, coupled with new all-time highs in the market, the Fed chairman said a cut in March should not be assumed.
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