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Investors are increasingly convinced that the Federal Reserve will cut rates aggressively next year as inflation slows – even if the economy experiences a “soft landing”, with growth and employment holding up relatively well.

We’re not so sure.

Scientists have long known that we tend to carry the macroeconomic lessons learned in our youth throughout our lives. People who lived through the Great Depression remained less likely to participate in stock markets throughout their investing careers, more favourable economic conditions led the early Baby Boomers to maintain persistently higher allocations to equities, and individuals who came of age around the 2008 global financial crisis were significantly less likely to purchase a home. Recent research suggests that these effects begin very early – children who see their parents suffer negative economic shocks also avoid risk in their personal and financial lives.

All of the members of next year’s Federal Open Market Committee – the group responsible for setting monetary policy – were in their formative years when Federal Reserve chair Arthur Burns repeatedly cut interest rates in response to evidence of slowing inflation, only to see it re-accelerate. In 1981, when US price growth peaked and Paul Volcker was forced into raising rates to 20 percent, they were 18 years old on average.

Our conclusion (although it’s admittedly far from scientific) is that the bar to loosening policy is probably higher than markets currently believe. A slowdown in inflation doesn’t seem sufficient, meaning that unless the economy experiences a “hard landing” – which isn’t currently priced in – we don’t see Fed officials delivering cuts in rapid succession through the course of 2024.

Or, to put it another way: if you go long in the expectation that policymakers have short memories, you might make some memories of your own – and not the good kind.

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