On Wednesday, something strange happened to the economy: For the first time since the dawn of the pandemic, it started to look, well, normal.
Consider these three new pieces of data, all released within hours. The first was an inflation report, which showed that prices were rising at the slowest pace since last July — with grocery prices staying at a level lower than they were in February. Second, wages are still rising faster than inflation, which puts consumers on a better footing to afford their lifestyle. These two sets of data alone would be cause for great news. They show an equilibrium returning to the U.S. economy after years of bad vibes and trillions of dollars in stimulus extended our inflationary era past the three-year mark. And it didn’t even account for the fact that, across some of the biggest retailers in the country, prices are actually starting to fall.
Then, the Federal Reserve — the most powerful government organ in the world economy — came out with what amounted to a sunny long-term weather report. It acknowledged there has been “modest progress” against inflation. Most Fed officials predicted the central bank will cut rates at least once by the end of the year, amounting to a quarter-point fall in benchmark interest rates. Practically, it would not be a giant change — the equivalent of $17 less per month for every $100,000 on a mortgage. But it signals that the economy is going in the right direction. By the end of 2025, there are likely to be four more cuts, the predictions show. Practically, it means that the era of high interest rates is soon going to end.
Wall Street hardly reacted to the report, probably because one cut was broadly expected. But there is good reason to think that only a single cut actually undersells the optimism at the central bank. According to the Fed’s survey of its officials, the most popular position was for two cuts this year, even though there isn’t an outright majority of Fed governors who support it.
The caveat is that we’ve seen this happen before, most recently in December, when Wall Street leaned too hard into an optimistic Fed report. At the time, the central bank was predicting three rate cuts this year, while banks and traders were calling for five or six. This rapidly went into reverse during the first few months of the year. For a while there, it looked like rates might not change at all. Larry Summers pontificated that they could even go up. For a couple of months, it was bleak.
There are still plenty of questions outstanding about the economy. During a press conference after the data release, Fed chair Jerome Powell seemed less inclined than usual to give a sense of when there might be a cut — perhaps because stock and bond traders have had a tendency to frustrate him. Inflation could tick up again, which could derail plans to cut rates anytime soon. For what it’s worth, Wall Street markets believe that the first rate cut since 2020 will come in September, and an additional rate in December is a toss-up. “We can’t know what the future holds,” Powell said during the press conference. “In the meantime, we’ve made pretty good progress on inflation with our current stance.”
