To The Moon

The Federal Reserve just can’t seem to shake off its habit of making shaky economic predictions—always a step behind when it comes to responding to market changes. At the latest FOMC meeting, the Fed decided to pause its rate-cutting cycle, adjusting its policy stance. 

According to Forbes:“The Federal Open Market Committee (FOMC), the Fed’s policy-making body, unanimously voted to keep the federal funds rate at 4.25% to 4.5%. This decision, announced Wednesday afternoon after a two-day meeting, marks a break from three consecutive rate cuts since September. The last time the Fed paused rate cuts was back in March 2020.”

The FOMC statement noted that unemployment "has remained stable at a low level," while inflation "is still elevated." Interestingly, the Fed also removed previous language suggesting inflation was "gradually approaching the 2% target."

It’s worth noting that the Fed has two key responsibilities: ensuring maximum employment and keeping inflation in check. These two factors are crucial not just for economic stability but also for maintaining a healthy financial system. A strong job market and stable inflation help boost economic activity, increase credit access, and lower default rates—keeping the financial world from spiraling into chaos.

A History of Misses

However, the Fed’s track record in forecasting economic growth has been, well… less than stellar. A comparison of its projections and actual GDP since 2011 shows a consistent gap.

When future growth estimates are wildly off—especially during crises—the risk of policy missteps skyrockets.

The Unpredictable Factor

One of the biggest headaches for the Fed is dealing with unpredictable events that can throw consumer behavior into chaos, making accurate forecasts nearly impossible. This issue is especially pronounced today, with consumer spending accounting for nearly 70% of the U.S. economy.

That said, since 2000, rising household debt hasn’t led to the same economic expansion as before. Unlike the 1980s to 2000, when borrowing helped lift living standards, households today are mostly relying on debt just to maintain their current lifestyle—rather than improving it.

The Fed’s Tricky Balancing Act: Confidence vs. Reality

The Federal Reserve relies heavily on consumer confidence to drive economic growth, often aiming to boost spending by propping up asset prices. But here’s the catch—while asset prices have risen, the bottom 90% of earners haven’t seen meaningful wealth gains. This explains why nominal economic growth keeps drifting back toward its long-term 2% trend—and may even dip below it in the coming years.

Debt is another thorn in the side of economic prosperity. Instead of fueling productive investments, a significant portion of capital is redirected toward debt repayment, stifling financial progress across income groups.

The Fed’s Forecasting Struggles

Economic growth is fundamentally a function of production and consumption. If policies fail to foster prosperity, it’s a sign that the Fed’s projections may once again be off the mark—especially regarding the strength of the labor market.

Why Job Growth Matters

Employment is the backbone of economic expansion. As we’ve pointed out before:

“While recent macroeconomic data seems decent at first glance, a deeper dive reveals warning signs—labor demand is softening. Investors should take note because employment, economy, and markets are deeply intertwined. In a consumer-driven economy, jobs power spending. People need to produce before they can consume, making employment crucial for corporate profits and market valuations.”

Without a robust labor market, economic activity slows, and inflation expectations weaken. Increased government spending might temporarily mask softening demand, but sustaining this model requires ever-increasing levels of debt—an unsustainable long-term strategy.

Given employment’s pivotal role, the Fed’s optimistic assessment of the labor market poses a significant risk to its forecasts. At the latest FOMC meeting, analysts quickly latched onto the "strong jobs market" narrative to justify delaying further rate cuts.

Lindsay Rosner of Goldman Sachs noted:“With strong economic growth and a resilient labor market, the Fed has room to be patient amid high data uncertainty. While the easing cycle isn’t over, the FOMC wants to see further improvement in inflation before cutting rates again, as seen in their removal of prior language about inflation progress.”

The Fed’s Chronic Lagging Issue

Historically, the Fed has been slow to react, often adjusting policy only after economic events have already made their mark. This pattern suggests that they may once again be underestimating labor market weaknesses.

David Rosenberg of Rosenberg Research warns:“We believe the Fed’s forecast is out of sync with reality. Job growth is far weaker than their statement suggests. Most new jobs are part-time, hiring rates have plummeted, continuing jobless claims are rising, and consumer sentiment on the labor market is shaky.”

He has a point. Data shows a growing divergence between full-time and part-time employment, with part-time jobs making up a significant share of recent employment gains.

Since full-time employment is crucial for higher wages, benefits, and financial stability, a decline in its share often signals economic weakness and potential deflationary pressures. Past trends indicate that when full-time employment peaks, economic downturns often follow (2020 was an exception due to mass layoffs temporarily boosting full-time employment figures).

Current economic data may justify the Fed’s decision to pause rate cuts—for now. However, once future data revisions reveal underlying labor market weaknesses, the Fed’s optimism on jobs and inflation stability could prove to be yet another policy miscalculation.

Oops, The Fed Did It Again!

The Federal Reserve just can’t seem to shake its old habit—leaning too heavily on past data, which raises the risk of another policy misstep. And when that happens, financial markets, economic growth, and consumer confidence could all take a hit.

On the surface, recent economic numbers look solid, but consumers don’t seem convinced. Just take a look at their expectations for next year’s income—they’re anything but optimistic. Michael Lebowitz recently pointed out:

“The labor market data may look fine at a glance, but cracks are forming. Continuing jobless claims have hit their highest level in over three years, and hiring rates from the JOLTS report are at their lowest in a decade. While layoffs aren’t surging, employers aren’t hiring much either. So while the job market seems stable, deeper data suggests trouble ahead. If consumers start tightening their wallets, things could get messy fast. In fact, the following charts already paint a worrying picture—job expectations are plunging. And in the past, that’s been a precursor to rising unemployment.”

More part-time jobs, slower hiring, and rising unemployment claims all signal a weakening job market. The Fed has made this mistake before—overestimating employment strength and delaying rate cuts, only to scramble when the economy took a turn for the worse.

A Debt Dilemma

Another headache for the Fed? The rising cost of borrowing. With heavy debt loads, stagnant wages, and high interest rates, consumers are relying more on credit just to get by. If rates stay elevated, disposable income will shrink even further. And if consumers pull back on spending, inflation could fall faster than expected, posing a major risk to financial and economic stability.

The Bigger Picture

A faulty Fed forecast doesn’t just impact jobs and spending—it could amplify market volatility, disrupt corporate investment plans, and even deepen a potential recession. History has shown that the Fed is often slow to react, waiting until the damage is done rather than proactively addressing risks. That’s why investors should stay cautious and prepare for potential shifts in monetary policy that could sway market trends.

For now, the Fed’s decision to pause rate cuts might seem justified based on current data. But what if the numbers take a sharp turn in the coming months? If history repeats itself, the Fed could once again miss the window for timely policy adjustments.

Then again, accurately predicting the future has never exactly been the Fed’s strong suit.

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