Markets came away from last week’s Federal Reserve meeting showing near-certainty that interest rates cuts are coming in June, with more to follow through the year and into the future. They may yet be wrong. A few factors pose a threat to keep central bankers cautious and back off indications that three cuts are coming this year and in 2025. The most apparent one is inflation if the data continue to show price increases running higher than expected. The other less obvious one is political, particularly the calculus the central bank will have to get right to ensure it doesn’t look like it’s trying to tilt the playing field. Market veteran Ed Yardeni, founder of Yardeni Research, entertains the possibility that the political calendar this year could pose a scenario where the two factors collide. In that case, the Fed may have to push cuts out until the end of the year, confounding market expectations. “If the inflation data remain stubbornly above the Fed’s 2.0% target over the next few months, that might prevent the Fed from cutting rates before the summer political conventions. If so, then the nonpolitical monetary policy committee might postpone considering rate cuts until after the November presidential elections,” Yardeni wrote last week. “That would be the politically prudent thing to do since the Fed values its independence above all other considerations,” he added. Fed officials, of course, reject any notion that political considerations play a role in monetary policy. But election years can pose tricky questions when it comes to such matters. In the problematic scenario that Yardeni posed, stronger inflation data might make the Fed hesitant to cut at its June and July meetings, pushing the decision into September, the heart of election season. The Fed then meets Nov. 6-7, immediately following the election. “That could be the first rate cut decision of this year,” Yardeni said. “The second cut could be announced on December 18, after the last meeting of the year. That’s if such cuts are warranted.” Fed Chair Jerome Powell acknowledged that nothing is certain and predicted it will be a “bumpy ride” back to the central bank’s 2% inflation goal. “The question is, are they more than bumps? And we just can’t know that,” Powell said at his news conference Wednesday. “That’s why we are approaching this question carefully.” Yardeni isn’t the only one unconvinced the Fed might not come through with cuts. Policymakers themselves seemed conflicted at the meeting, with 10 Federal Open Market Committee members seeing three cuts against 9 who expect two, according to the “dot plot” of individual members’ unofficial outlooks. “We maintain our expectation of just two rate cuts this year , in July and December,” economists at Nomura said in a client note. “The dot distribution suggests the FOMC is divided between two and three cuts this year, and policymakers are likely to be sensitive to upside surprises in inflation data.” Former Fed Vice Chair Richard Clarida said during a CNBC interview Friday that he sees one cut as certain but said “there can be a very good case” against three cuts if inflation stays stubbornly higher. Clarida also noted that if the Fed judged inflation by the consumer price index instead of its preferred personal consumption expenditures price index, “we wouldn’t even be discussing rate cuts.” The February PCE numbers will be released Friday. Most economists expect the monthly increase to be around 0.3%.
