If the Federal Reserve does not lower interest rates by September, I anticipate problems in the economy, which means troubles in the market. The Federal Reserve has constantly stated that it is data driven. Which is good, but from an economic viewpoint, it can be very bad. The bad thing is that all the numbers are lagging indicators. And current numbers point to an economy that is cooling much quicker than the current stock market indicates. (an example of lagging indicators are how interest rate hikes affect the economy). The Fed started raising rates in March 2022, raising rates to 0.25-0.50.
That rise and the next few did little to stop the runaway train (the economy) that was flush with fresh cash (the M2 money supply hit its peak in April 2022). The best way to think of the M2 money supply according to AI is, the sum of all the dollars sloshing around in our wallets, bank accounts, and other financial nooks and crannies. (readily spendable)
The last interest rate hike was July 2023. From 5.25-5.50. That means the economy has now had time to feel the full effect of all the interest rate hikes. And consumption is tailing off fast. Example: The new car inventory in the U.S. has seen a significant increase. As of May 2024, the total supply of available unsold new vehicles had reached 2.84 million units. Which is a 51% increase compared to the same point period last year. More troublingly, in July, available unsold new vehicles went from 2.84 million units in May to 3.17 million units in July (expect rebates to start popping up before year-end). In the housing market, preowned homes are finally increasing, and the average price drop of all listings has been 14.9% (remember, everything is a supply-and-demand equation). The recent decrease in new home sales is over 6% compared to the previous period.
Over the past 60 days, retail consumer sales in the U.S. have shown signs of slowing down. In May 2024, retail sales barely rebounded, with a 0.1% increase following a 0.2% decline in April. The above numbers don’t lie, and many numbers that have come out recently have been revised lower. In my opinion, the Federal Reserve should lower rates in July, or it will put the Federal Reserve behind the curve and have to play catch up (lowering rates by ½ a basis point instead of a ¼ basis point). But the markets are unfortunately pointing to a September rate cut.
Bottom Line: If the Federal Reserve is reactive and not proactive with interest rates, there is a real possibility of a recession next year around this time. The Federal Reserve needs to lower rates now!