Image Source: PexelsIt’s widely expected that the Fed will cut its target interest rate in September. Nonetheless, Fed Chair Powell insists that the decision will be data-dependent. Suppose the Fed decides not to cut interest rates in September—what will that imply about growth prospects for the fourth quarter of 2024? Should that lead us to revise down our forecasts, or should we increase the forecast for growth?Here the answer depends on whether you are making a conditional prediction or an unconditional prediction. Let’s start with conditional predictions:Suppose that at the time of its September meeting, 12-month PCE inflation has been running at about 2.5% and the Atlanta Fed continues to predict that 3rd quarter real GDP will grow by 2.8% (which is its current prediction.) Under those conditions, a Fed rate cut would likely lead to faster economic growth expectations than a decision not to cut rates.Now let’s look at an unconditional forecast. Would I expect faster economic growth after a rate cut, or after a decision not to cut rates? Probably the latter. That’s because the Fed would only refrain from cutting rates in September if the economy were to show significantly more momentum than is currently expected. A decision not to cut rates would likely reflect an unexpected change in the trajectory of the economy. If all I knew was that the Fed opted not to cut rates, I’d raise my forecast for 4th quarter GDP growth.This is one reason why I don’t like to talk about interest rates. When I hear pundits predicting a rate cut in September, I’m never clear as to whether they are making a prediction about the future path of monetary policy, or the future path of the economy. I’d rather they tell me what sort of NGDP growth they expect over the next 12 months, but I almost never see that sort of prediction.More By This Author:Go Midwest, Young Man? Children Are The Future Facing Or Creating?
