President Donald Trump praises outgoing economic adviser Gary Cohn (L) during a Cabinet meeting at the White House, Washington, March 8, 2018.

Kevin Lamarque | Reuters

The U.S. economy is “back to normal” for the first time in two decades, but the market has gotten ahead of the likely pace of interest rate cuts, said Gary Cohn, vice chairman of IBM.

According to CME Group’s FedWatch tool, the market is narrowly pricing in an initial rate cut by the Federal Reserve in May 2024, with cuts of about 100 basis points expected over the course of the year.

In September, the central bank paused its historically aggressive monetary tightening cycle and set the target range for the Fed’s key interest rate at 5.25-5.5%, up from just 0.25-0.5% in March 2022.

Cohn – who was former US President Donald Trump’s chief economic adviser from 2017 to 2018 and is a former director of the National Economic Council – expects the Fed will not begin easing its position until the second half of next year at the earliest following similar events Actions taken by other major central banks that started raising interest rates earlier.

“You don’t want to leave too early if you’re the last one to the party. You have to be the last one to leave the party, so the Fed will be the last one to leave this party,” Cohn told CNBC’s Dan Murphy on stage at the Abu Dhabi Finance Week conference on Wednesday.

“The economy will clearly weaken before the Fed has started cutting interest rates. Therefore, I strongly believe that we will not see interest rate activity at the Fed in the first half of 2024. Perhaps.” [in the third quarter]we will hear rumors of a future forecast of lower interest rates.

The U.S. consumer price index rose 3.2% year-on-year in October, unchanged from the previous month, but well below the pandemic-era peak of 9.1% in June 2022.

Despite the sharp rise in interest rates, the US economy has so far remained resilient and has avoided a widely predicted recession. This is fueling bets that the Fed can engineer a fabled “soft landing” by reducing inflation to its 2% target over the medium term, triggering an economic downturn.

Cohn highlighted that U.S. consumer debt has risen to record levels of over $1 trillion and that consumer spending is continuing despite tightening financial conditions. He said the consumer and overall economy had “returned to normal, but we have all forgotten what normal is.”

“We have not experienced normality for more than two decades. We’ve had more than a decade of zero interest rates, we’ve had a decade of quantitative easing and zero interest rates and the Fed trying to figure out if they could create inflation,” he said.

“We’ve gone from the Fed not being able to create inflation – we now know the answer: the Fed can’t create inflation, but the market can – to trying to mitigate a shorter-term inflation shock. We’re back.” a normal world.

He noted that the 100-year average of 10-year U.S. Treasury yields is about 4.5% and that the 10-year Treasury yield has fallen to about 4% from the 16-year high of 5% in October .3% weakened on Wednesday morning. Inflation is now approaching “back to the mean” between 2% and 2.5%.

“So if you look, all the economic data is kind of moving back towards its very long-term average. If you look at these 100+ year generational cycles, it seems like we’re in that phase right now,” Cohn added.

Correction: This story’s headline has been updated to reflect Cohn’s quote.

Source : www.cnbc.com

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