Fed won’t cut rates this year says Mizuho and warns: Don’t bet against the US consumer

Mizuho economists have based their 2024 outlook on a dramatically contrarian perspective – the Federal Reserve won’t cut rates this year.

Diverging from the consensus that anticipates several Fed rate cuts in 2024, analysts contend that economic conditions may not align with the central bank’s desires. They emphasize the resilience of American consumers, citing their spending habits as a key factor.

Acknowledging the Fed’s inclination to cut rates, analysts highlight the third quarter’s acceleration in real GDP to 5%, despite concerns of a credit-induced recession, which serves as a testament to the robustness of consumer spending.

“Recently I was asked the question: “Was I fighting the Fed?” This is a fair question, since analysts may be the only ones on the Street who do not have Fed rate cuts as part of their 2024 macro outlook,” analysts said.

“On a more detailed level, however, analysts are not fighting the Fed! It is very clear that this Fed wants to cut rates; however, our analysis suggests the economy/labor market is not apt to give policy makers the opportunity they want to cut rates.”

Contrary to fears of a credit crunch prompted by ongoing yield curve inversions, analysts assert that a fundamental driver for such a scenario is lacking. Healthy balance sheets across households, non-financial corporations, and the banking industry, along with the absence of asset-liability mismatches or asset price bubbles, dispel concerns of an imminent credit squeeze.

Analysts caution against waiting for a supposed second shoe to drop, suggesting that this perspective is unfounded.

“Betting against the American consumer is single biggest mistake domestic forecasters make repeatedly, and not betting against the Fed.”

In the absence of a credit crunch and liquidity squeeze, analysts see an optimistic outlook for 2024. With a tight labor market and a steady increase in nominal wages, they predict limited room for the Fed to implement rate cuts, despite their expressed desire to do so.

“Our 2024 outlook is decidedly more upbeat than the 1% consensus forecast for real GDP, implying that a tight labor market will limit the Fed’s ability to cut rates as it so desperately wants to do.”

“Moreover, if the Fed were to cut rates without the data justifying the policy shift, then the dollar will collapse in value and the good disinflation experienced in 2023 will reverse sharply,” they concluded.