The Fed become too data dependent and has lost sight of its overall strategy, at least, is what Mohamed El-Erian, chief economic advisor at Allianz, said on Friday, April 5, 2024. The influencer economist said in other words that the Fed has turned into a play-by-play commentator. The comments follow a recent chorus of Fed policymakers who have begun speaking conservatively about rate cuts.

Well, brace yourself for an economic riddle that defies the conventional wisdom of the “financially-savvy.” Just as Wall Street is betting on the Federal Reserve to cut rates this year, recent economic data is throwing a curveball, hinting at an economy that’s heating up rather than cooling down. The majority of sell-side desks anticipate a 25-basis-point cut in June, followed by two to three additional similar cuts by year’s end. But is this the right move for an economy finally coming off the inflation boil and showing signs of reacceleration in certain areas?

Take the March ISM Manufacturing PMI, for instance. It was stronger than analysts estimated and, more importantly, topped 50 for the first time since late 2022, indicating that the manufacturing sector is in an expansion phase once again. Couple that with an unemployment rate well below the historical average at 3.9% and a GDP humming at 3.4%, and you’ve got a recipe for a potential economic resurgence.

But here’s the rub: progress to bring inflation to heel remains slow and “bumpy.” Fed Chair Jerome Powell’s biggest headache right now is an economy that reaccelerates, requiring further rate hikes. This is the so-called no landing scenario, a fate that befell Paul Volcker, who led the Fed in the late 1970s and early 1980s and presided over a “double-dip” recession as he tamped down inflation that at one point spiked to 15% annually.

It’s tempting to read Wall Street reports that can handicap rate-cut odds to three decimal places and predict where the S&P 500 will land on the final trading day of the year. But history has a way of rhyming, not repeating. Over the last 50 years, the Fed has presided over 22 rate-cutting cycles, most of which were short-lived, especially during the period of high inflation in the US that persisted through the 1970s and 1980s.

So, what’s the safe bet? Remember that each time is different. The Fed is a different animal than it was decades ago, as is the US economy and the world at large. As we stand on the precipice of potential economic reacceleration, it’s worth questioning whether rate cuts are the right move or if they’re just a risky gamble in a game with high stakes.

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