It is widely expected that the Fed will cut its target interest rate in September. However, Fed Chairman Powell has maintained that the decision will depend on the data. If the Fed decides not to cut interest rates in September, how would that affect the growth outlook for the fourth quarter of 2024? Would that result in a downward revision of growth forecasts, or should growth forecasts be raised?
The answer here depends on whether you are making a conditional or unconditional prediction. Let’s start with conditional predictions.
Let’s assume that as of the September meeting, 12-month PCE inflation is running at around 2.5% and the Atlanta Fed continues to project that third-quarter real GDP will grow by 2.8% (which is its current forecast). In these circumstances, a Fed rate cut is likely to raise expectations of economic growth more than a decision not to cut rates.
Now, let’s look at the unconditional forecast. Do I expect economic growth to accelerate after a rate cut, or after a decision not to cut rates? Probably the latter, because the Fed would refrain from cutting rates in September only if the economy gains significantly more momentum than currently expected. A decision not to cut rates would likely reflect an unexpected change in the economy’s trajectory. If I only knew that the Fed chose not to cut rates, I would raise my fourth-quarter GDP growth forecast.
This is one of the reasons I don’t like to talk about interest rates. When I hear pundits predicting a rate cut in September, I’m not sure if they’re predicting the future direction of monetary policy or the future direction of the economy. I’d rather they tell me what kind of NGDP growth they expect over the next 12 months, and I rarely see such predictions.
