My crystal ball is that there will be two more rate cuts this year. Markets are predicting about a 60% chance of three rate cuts, but I think the Fed will continue to be cautious.
A lot of my feeling about the macroeconomy is based on fireworks sales. It is a very discretionary purchase that gives some insight into how consumers are feeling. This year, sales were up about 20% compared to last year. This increase in sales is likely due to the 4th being on a Thursday rather than a Tuesday. However, I think that consumers are not fully pulling back, but are really searching for lower priced items. Fireworks that were markedly lower in price this year compared to last year sold much better than fireworks that were just a little lower priced. All fireworks were lower in price this year than last year, but some more than others. On average I would say prices were 15-20% lower than last year. Given that fireworks are much higher in price now than they were in 2020 (about 65% higher), we are likely on a fairly elastic portion of the demand curve. The drop in prices this year resulted in an increase in revenue. The overall point being, while consumers have some willingness to spend, they are really searching for lower prices and are not willing to spend on things that remain elevated in price.
This indicates a slowing economy where consumers are cautiously confident and are fatigued by higher prices. This behavior, along with a softening labor market, gives the Federal Reserve some room to lower their target for the fed funds rate. However, I believe the FOMC will be very reticent to lower interest rates too much and they will avoid giving inflation any oxygen to start burning again. As I predicted, not on here, but to my classes, the FOMC was about 6-12 months too late in starting to raise their target for the fed funds rate. They know this now and will err on the side of too restrictive policy until March of 2025.
Once we hit March of 2025, I would look for five more rate cuts in 2025. A slow, gradual easing of monetary policy that results in a target range of 3.50% - 3.75% as we go into 2026.
