Here’s what it would take for the Fed to start slashing rates in 2024

Interest rate cuts don’t happen during good times, something important for markets to remember amid hotly anticipated easing next year from the Federal Reserve.

If the Fed meets market expectations and starts cutting aggressively in 2024 it likely will be against a backdrop of a sharply slowing economy and rising unemployment, which in turn would bring lower inflation.

Central bank policymakers, however, won’t cut for the sake of cutting. There will have to be a compelling reason to start easing, and even then rate decreases are likely to come slowly — unless something breaks, and the Fed is forced into more aggressive action.

“The market keeps trying to front-run these rate cuts, only to be disappointed,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “In a different cycle, when inflation hadn’t spiked so much, I think the Fed would have been cutting rates already. This is a very different cycle. There is going to be much more caution on their part.”

The latest market rumble over the prospect of rate cuts came Tuesday morning, when Fed Governor Christopher Waller said he could envision easing policy if inflation data cooperates over the next three to five months.

Never mind that fellow Governor Michelle Bowman, just minutes later, said she still expects rate hikes will be necessary. The market instead chose to hear Waller more clearly, perhaps because he has been one of the more hawkish Fed officials when it comes to monetary policy, while Bowman was merely reiterating an oft-stated position.

“If the economy moderates at all, you could be talking about a real disinflation story, and I think that’s what Waller would be getting at,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “If the real fed funds rate continues to go higher as I expect…