Wall Street is desperate for the Federal Reserve to stop raising rates and begin easing, and Wall Street couldn't be more wrong.
Since the Great Financial Crisis of 2008 and 2009, markets have looked to the U.S. central bank to solve and save us from all problems economic. Unfortunately, acting as "messiah" is not one of the Fed's dual mandates. Price stability and maximum employment are the two mandates, and the "price stability" thing isn't working.
The COVID pandemic that shut down societies and economies around the globe spurred central banks and Treasuries to open the floodgates on cash. Economies were saved from profound contractions and citizens from more desperate suffering because of the rapid intervention. This cash kept much economic demand intact as consumers, locked at home, turned to the internet and consumed what they could.
Getting stuff became a problem as factories were closed for Covid and a shortage of dock workers and truck drivers heeded government warnings to stay home, and ships blockaded major US ports. Because those workers were getting new government checks every two weeks, they could afford to stay home. Lots of cash chasing a more limited number of goods sent prices for most everything higher and created a headache for the Fed.
Reasonable experts will disagree as to when the government largesse should have stopped, but almost all agree that it should have stopped far sooner, and not doing so ignited the current blight of inflation that the Fed has been fighting for more than a year.
I liken this error to delivering cardiac drugs to the patient suffering from a dangerously high heart rate. How much medicine is necessary and how frequently should it be given? If the regimen is to administer additional doses every five minutes, it would be easy to onboard so much medicine that the patient's heart rate not only slows but crashes and requires the defibrillator. The Fed has been giving a lot of medicine with insufficient time lapses for observation and reassessment of the patient.
I've been privileged to know many members of the Federal Reserve over the years. They are brilliant, thoughtful and patriotic. They want to do the best than can be done for the American economy, and they want to be correct. Their job is extremely tough. It is guess-work based on data that move slowly and stubbornly. Managing monetary policy is both art and science and has never been perfect. There are always mistakes. As often as not, the job of the Fed is to manage through its own mistakes, and that seems to be happening again.
One thing every Fed governor has told me is that the Fed hates to make the same mistake twice. Their most glaring historical mistake has been easing prematurely. Defeating inflation, even the part of it that is of their own making, is job one. They don't want to repeat the mistake of pausing too early. The want to see inflation dead and toe-tagged on a cold gurney, but they must wait.
The Fed wants to tame inflation. The Federal Reserve's Open Market Committee will not cut rates because they want to help the S&P 500 climb to new highs. They will cut only when they must rescue the economy and apply the paddles. This is not a desirable moment. It will be ugly.
Some on Wall Street are calling for three rate cuts before year-end. These folks must be expecting a severe, almost dire economic contraction because that's the only reason the Fed would reverse course. If the Fed somehow has gotten policy right, they won't have to ease, and the economy will resume a modest growth rate, and inflation will subside to acceptable levels.
History tells us that this rose-colored outcome is quite unlikely. But I guess we can hope.
Let's hope the economy slows just enough and finds its ideal sweet-spot and that the Fed will not have to ease.