Former Trump advisor says the U.S. economy is 'back to normal,' but markets may be jumping the gun on rate hikes

The U.S. economy is "back to normal" for the first time in two decades, but the market is getting ahead of the likely pace of interest rate cuts, according to IBM Vice Chairman Gary Cohn.

The market is narrowly pricing a first rate reduction from the Federal Reserve in May 2024, according to CME Group's FedWatch tool, with around 100 basis points of cuts expected across the year.

The central bank in September paused its historically aggressive monetary tightening cycle with the Fed funds rate target range at 5.25-5.5%, up from just 0.25-0.5% in March 2022.

Cohn — who was chief economic advisor to former U.S. President Donald Trump from 2017 to 2018 and is a former director of the National Economic Council — does not see the Fed starting to unwind its position until at least the second half of next year, after similar moves from other major central banks that began hiking sooner.

"You don't want to be early to leave when you're the last one to come to the party. You have to be the last one to leave the party, so the Fed is going to 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 turn down before the Fed had starts to cut interest rates, so I strongly believe that for the first half of '24, we will see no rate activity in the Fed. Maybe [in the third quarter], we'll start hearing rumblings of some forward guidance of lower rates."

The U.S. consumer price index increased 3.2% in October from a year ago, unchanged from the previous month but down considerably from a pandemic-era peak of 9.1% in June 2022.

Despite the sharp rise in interest rates, the U.S. economy has so far remained resilient and avoided a widely predicted recession, fueling bets that the Fed can engineer a fabled "soft landing" by bringing inflation down to its 2% target over the medium term without triggering an economic downturn.