In December 2023, the U.S. stock market was experiencing a Christmas run. Although underlying inflation showed indications of decline, the United States Federal Reserve showed no indications of a beginning to interest rate cuts. Regardless – or with disregard – the U.S. stock market buzzed with surreal expectations. Then, in January Fed Chair Jerome Powell offered comments which traders interpreted, largely without basis, as indication the Fed would make six 25 basis point cuts throughout 2024. The market reacted by running with bulls from late January to early February, and set Wall Street racing whilst nations such as the United Kingdom and Japan slipped into recession. Now only 40-percent of economic analysts expect recession in the U.S. this year, the lowest mark since the fed started interest rate hikes in 2022. Even in January U.S. unemployment numbers ran steady at 3.7%. Despite numerous attempts from Powell to offer clarification, many analysts believe that the Fed will cut rates anywhere from three to six times this year, each at 25 basis points. The year 2024 has begun with an extension of a year-long trend for the US market and economy defying expectations of a recession and upwards unemployment.

Market analysts pricing in six 25bps rate cuts this year are taking a bit of an unmeasured risk, emulating expected second quarter market conditions in the first quarter. These bull traders – perhaps better known as the Goldilocks traders expecting a perfect landing – have not considered how the market might react if the Fed begins to cut in March while several other major economies are dipping into recession. Would the market react with another running of the bulls, or more measured as they had already priced-in the ‘cut reaction’ in January and February?

Moreover, the current Israel-Hamas war shows no signs of ending by March. As long as the war remains kinetic, there is a larger window open for kinetic-conflict to expand throughout the region; this threat is looming across markets, specifically anyone who relies on trade through the Red Sea or financing in the Gulf. Reverberating back to the U.S. market, the worst-case scenario is a bloody conflict continues while the Fed indicates no cuts, and the global economic situation continues to dim. For market traders investing in high-risk assets, pricing in six fed cuts creates a precarious bubble that may, or may not, price in global conflict.

The best-case scenario is that March, now a week away, opens with the Fed suddenly deciding to cut (although Powell would be at risk of ruining his institution’s credibility by doing so now a month worth of comments offers that he will in fact, not do this) and a negotiated pause or end to the Israel-Hamas conflict. This scenario would also probably prefer steady employment outlook in the U.S., another uncertainty in the complicated risk-calculation.

The point standing is, by pricing in six rate cuts, market analysts must make several other assumptions about the global market and economy. Six-price cut estimations rely on a Goldilocks scenario that would fundamentally open the Fed itself to risking credibility, something the Fed and Jerome Powell have so far masterfully avoided. If price cuts begin in March, then the fed is seeing an economy that can no longer ease itself through the turbulence of deflation; and why would the Fed cut rates when job reports are steady and the market can frenzy itself up into a run without any substantial data to back up the run? A cut would encourage the most bullish traders and analysts to start running the economy, risking a run that would result in a bubble so large the fed now has a door open to the ultimate worst-case scenario: rising underlying inflation following a rate-cut that would necessitate a rate hike in Autumn 2024 right before the U.S. election.

Further troubling any expected rate cuts through the first six months of 2024 is the 0.4% rise in Core PCE, indicating a rise in underlying inflation that will give further heed to the Fed’s statements that the battle is not yet over. Hence, the earliest any rate cut might come is June, when the Fed can monitor data to identify if January’s Core PCE report was a residual elf-run blip or an extension of the economy turning towards a recessionary landing.

While three cuts are certainly on the table (June, September, and November, each 25bps), there is also too much uncertainty to measure in more than two. If the Fed cuts in June or July, a second cut would naturally establish a trend-line that can help the market maintain altitude for a soft-landing. A third-cut could nail the landing, although in a year of full elections, and potential conflict, uncertainty abounds regarding how markets and economies might react to the US November presidential election (it is likely to simply ‘observe’ without much reaction either way), and what might happen in the Ukraine-Russian war and the Israeli-Hamas conflict.

While the Fed has a singular job and battle right now – cut inflation and help bring the economy in for a soft-landing without recession – the data which fuels their decisions have too many unknowns and possibilities to provide any current ‘knowns’. In an ideal world, would Jerome Powell like to return the economy to ‘normal’ and land inflation? Almost certainly. But this is not a calm market or economic environment, and the factors feeding the base data are too varied to provide any certainty for what drives conditions in one month, much less what happens in five months.