top of page

The Danger of a "Do Nothing Fed"

Updated: Jan 22

Today's financial markets experienced turbulence following the unexpectedly high December CPI figure, registering at 3.4%. This development casts doubt on the predictions of numerous analysts who foresaw the Federal Reserve beginning to reduce interest rates as early as March or June 2024. Despite some weaknesses, the economy maintains resilience, particularly in the service sector, which is a major economic driver.

Investor sentiment has been buoyed by the anticipation of the Fed's rate cuts, with expectations of at least four 0.25% reductions factored into the market's end-of-year rally. However, this optimism is precarious—if the Fed's actions don't align with these expectations, a significant market reassessment is inevitable.

The Fed is tightening monetary conditions
The Fed's tightening ofmonetary conditions by winding down the balance sheet. Source: Bloomberg

There are concerns regarding the Fed's intense focus on achieving a 2% inflation target. This narrow goal might lead to a prolonged period of restrictive monetary policy, potentially hindering the possibility of a gentle economic downturn ("soft landing") and instead steering the economy towards recession. Such a scenario would likely emerge from reduced consumer and business spending.

If this happens, market trends could shift negatively, potentially leading to a correction phase that only subsides when sufficient rate cuts are enacted to rejuvenate economic growth. This pattern of drastic Fed interventions—alternating between steep rate hikes and cuts—appears to be a recurring theme, shaping the economic landscape for the foreseeable future.

The Fed has a history of steep rate increases and cuts.
The Fed's pattern of steep hikes and cuts. Source: Bloomberg

This situation underscores the importance of cautious optimism and preparedness for potential shifts in monetary policy. Investors and market observers alike must remain vigilant, ready to adapt to the unpredictable dynamics of the Fed's actions and the broader economic environment.



Unless otherwise indicated all performance is sourced from Bloomberg.


The views presented are those of the authors and webinar or podcast hosts/participants, and should not be construed as investment advice. The authors, podcast participants, webinar hosts, or clients of WBI Investments, LLC (WBI) may own stock discussed in these insights. WBl is an investment adviser in New Jersey. WBl is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. WBl only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of WBI's current written disclosure brochure filed with the SEC which discusses among other things, WBI's business practices, services and fees, is available through the SEC's website at: This site contains links to third-party websites. WBl does not endorse, approve, certify, or control these websites and does not assume responsibility for the accuracy, completeness, or timeliness of the information located there. Your access to and use of such websites is governed by the terms of use and privacy policies of those sites, and shall be at your own risk. WBI disclaims responsibility for the privacy policies and customer information practices of third-party internet websites.

bottom of page