- Former U.S. President Donald Trump’s ex-chief economic advisor, Gary Cohn, predicts that the Fed will not cut interest rates until the second half of 2024.
- Cohn emphasized that the U.S. economy is “back to normal,” but people have forgotten what normal feels like, based on 100-year average data.
Gary Cohn, vice chairman of International Business Machines Corp. (IBM), during the Milken Institute Global Conference in Beverly Hills, California, U.S., on Tuesday, Oct. 19, 2021.
Kyle Grillot | Bloomberg | Getty Images
IBM Vice Chairman Gary Cohn states that the U.S. economy has returned to normal after two decades, but the market’s anticipated interest rate cuts are getting ahead of themselves.
The market is currently pricing a potential first rate reduction from the Federal Reserve in May 2024, with expectations of around 100 basis points of cuts throughout the year, based on the CME Group’s FedWatch tool.
The Federal Reserve paus ed its aggressive monetary tightening cycle in September, with the Fed funds rate target range at 5.25-5.5%, up from just 0.25-0.5% in March 2022.
Cohn, a former director of the National Economic Council and chief economic advisor to Donald Trump, believes the Fed won’t start unwinding its position until at least the second half of the following year, after other major central banks have started hiking sooner.
“You don’t want to be early to leave when you’re the last one to come to the party. You have to be the last one to leave the party, so the Fed is going to be the last one to leave this party,” Cohn told CNBC’s Dan Murphy at the Abu Dhabi Finance Week conference on Wednesday.
“The economy will clearly turn down before the Fed starts to cut interest rates, so I strongly believe that for the first half of ’24, we will see no rate activity in the Fed. Maybe [in the third quarter], we’ll start hearing rumblings of some forward guidance of lower rates.”
In October, the U.S. consumer price index increased by 3.2% from the previous year, with the rate considerably lower than the pandemic-era peak of 9.1% in June 2022.
Despite the significant increase in interest rates, the U.S. economy has remained resilient and avoided the widely predicted recession. This has fueled expectations that the Fed can orchestrate a “soft landing” by bringing inflation down to its 2% target without causing an economic downturn.
Cohn highlighted that U.S. consumer debt has risen to record highs of over $1 trillion, and consumer spending continues despite tightening financial conditions. He said the consumer and the broader economy are “back to normal,” but people have forgotten what normal means, mentioning the decade-plus zero interest rates and quantitative easing.
“We went through a decade plus of zero interest rates, we went through a decade of quantitative easing, zero interest rates, and the Fed trying to create inflation. We haven’t experienced normal for over two decades. We now know the Fed can’t create inflation, but the market can. We’re back into a normal world,” Cohn stated.
He also noted that the 100-year average for 10-year U.S. Treasury yields is around 4.5%, while the 10-year yield has decreased from its 16-year high of 5% in October to about 4.3% as of Wednesday morning. Inflation is also returning toward its average of 2-2.5%.
“So every piece of economic data is heading back towards its very long-term average. We seem to be running into that phase right now in these over 100-year generational cycles,” Cohn added.
