The economy showed surprising strength in 2023 by growing 2.5 percent, defying market expectations for the U.S. to slip into a recession under the weight of rising interest rates and high inflation. January’s labor market report continued this trend, with the economy adding 353,000 non-farm payroll jobs, almost twice the median forecast. In addition, the unemployment rate remains firmly below 4.0 percent, an indication of a historically strong labor market. Buffered by these tailwinds, the Federal Reserve has firmly pushed back on the notion that it will execute a rapid succession of rate cuts early in 2024.

To the contrary, the Federal Reserve has signaled its comfort in maintaining the federal funds target rate at a 23-year high as it awaits further confirmation that inflation is firmly under control. With prices reaccelerating in January, led by shelter costs, medical care, and transportation services, the data shows the fight against inflation may be far from over. Hence, any prospect of a March or May rate cut should likely be put aside for the moment.

However, the longer monetary policy remains restrictive, the greater the odds that higher borrowing costs and tighter lending standards may negatively impact the economy. When the Federal Reserve signaled in December that it was through with rate hikes, the market may have miscalculated how quickly rate cuts would materialize. But then again, this is the same Fed that deemed inflationary pressure as “transitory’ in 2021. For now, we should welcome the prospect of market stability with Fed and investor expectations growing more in sync over the past few weeks.