Evening Brief – 04.09.24
50-50
The consensus view that the Federal Reserve will lower interest rates by the end of the year may face challenges amid ongoing economic growth and rising energy prices (WTI crude oil has risen 25% in the last four months). Moreover, market sentiment indicates a less accommodative monetary policy stance, and some analysts are admitting that there may be zero interest rate cuts in 2024.
There’s also the recent seemingly inconceivable option of hiking interest rates. “While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse,” said Michelle Bowman, Federal Reserve governor and voting member of the Federal Open Market Committee.
That brings us to the release of CPI and PPI data for March on Wednesday and Thursday, respectively, which may help to explain, or perhaps further cloud, the outlook for monetary policy.
Headline CPI is expected to rise 0.3%, down from 0.4% in February, according to FactSet’s consensus. However, rising energy prices are predicted to push the annual inflation rate up to 3.4% from 3.2%. Meanwhile, core CPI is expected to fall further on a monthly and year-over-year basis.
It seems clear that the Federal Reserve’s 2% inflation target will remain elusive. Core CPI continues to fall, implying that a disinflationary regime is in place. However, the fact that the 1-year pace of core CPI is well above the equivalent for headline CPI, and both are above 3%, implies that the FOMC may not declare victory and begin cutting rates just yet.
“This is a strong economy. Make no mistake, it is backed by debt and somewhat by overburdened credit cards, but it is a strong economy,” said George Lagarias, chief economist at Mazars. “So the Fed will struggle to find the case to cut rates soon.”
If the case for decreasing interest rates remains premature, so does the belief that the disinflationary trend has reversed. The danger of sticky inflation remains, but progress is being made, if slowly.
Nonetheless, market sentiment is gradually reflecting altered expectations. Fed funds futures have decreased the anticipated probability of a June rate cut to a 50-50 chance, a significant decrease from over 70% two weeks earlier.
“If the data is too strong, then why are we cutting?” said Torsten Slok, chief economist at Apollo Global Management. “I think the Fed will not cut rates this year. Higher (rates) for longer is the answer.”