Rising Expectations for September Rate Cut

While pop culture enthusiasts scour social media to find “the song of the summer,” on the economic and financial front there is one clear winner. But don’t look for it on your curated feed. For this one, you have to reach back a little.

With consumers, economists and Wall Street prognosticators betting the house on an interest-rate cut next month, the true song of the summer is Carly Simon’s 1971 hit “Anticipation.”

Much has been written and debated on the idea of a “vibe economy” operating on a psychological level as much as a financial one. There is no denying that one’s perception of reality is, in effect, their reality, regardless of whether or not it is based on factual evidence. That idea of “vibenomics” explained how consumers could feel economic anxiety despite sustainable improvement in almost ever economic measure.

A robust jobs market, low unemployment, falling interest rates and solid consumer spending added up to an American economy on the rebound from the worst of the Covid-19 pandemic. But the math didn’t work for a lot of people who responded to survey after survey with strongly negative perceptions of the overall economic health of the nation.

It seems the vibe is changing and expectations are rising.

The Federal Reserve Bank of New York’s latest Survey of Consumer Expectations found that while inflation expectations over the short and long term remained stable, the medium-term outlook was more positive with concerns about rising prices down sharply.

Likewise, the University of Michigan’s most recent report on consumer sentiment remained virtually unchanged in May, June and July, maintaining its 33% increase since June 2022.

The Conference Board’s July release on consumer confidence showed a positive increase in attitudes about the economy as well.

While there are likely several reasons for the more optimistic perspectives, the good vibes are getting a strong tail wind from collective expectations the Fed’s Federal Open Market Committee will cut interest rates when it meets Sept. 17 and 18.

But what happens if there is no rate cut? Will consumers, expecting to be told interest rates are coming down and that is good for the economy and good for them, take it in stride if the Fed decides to hold back on monetary policy? Or will they take their wallets and go home, precipitating a “tantrum recession?”

Will investors weather the uncertainty and toe the line or panic and send Wall Street into a flat spin of volatility?

Raising expectations is not necessarily a bad thing. But the pent-up frustration of waiting for the economy to finally feel comfortable and having those hopes dashed is likely to shake the confidence of consumers and rattle more than a few boardrooms.

Feelings about the economy have always been important. But in this age of the information superhighway where rumors and engagement farming fuel hot take after hot take cultivating economic anxiety 24/7, today’s positive vibes can quickly become tomorrow’s doom and gloom.

The constant deluge of financial news and “expert” commentary creates a cycle where it is harder and harder to keep up and not feel overwhelmed. Economic turmoil is nothing new. We just hear about it so much more today than 50 years ago. And that only adds to the anxiety and fuels anticipation of hearing what we want to hear.

Maybe Carly was right and those were the good old days.