2024 Rate Cuts Back in Focus as Market Expectations say, “Yes” …Fed Speakers Say, “Wait and See”     

This week’s data indicated continued (slight) weakening of the jobs market and slowing retail sales (consumers pulling back). The past few “cool” inflation reports are (hopefully) indicating that the hot reports from Q1 were seasonal outliers. The futures markets now predict two rate cuts this year. Most likely one in September and one in December. Some traders made news on Tuesday with large option bets predicting a July rate cut. What’s the rush? Fed officials’ comments this week indicated no urgency to cut soon. Fed official Auston Goolsbee said he’s taking a “long view” on inflation. He pointed out that inflation is “way down” from its peak. Slowing as much as it ever has in a single year and yet the unemployment rate is still just 4%. Fed Governor Kugler: Another good month of reports may not be enough to cut rates. “There’s still some upward risks to inflation.” Fed President Alberto Musalmen: optimistic that inflation will return to the central bank’s 2% annual target, but it could take several quarters (!) to get there. Fed Governor Adrianba Kugler: U.S. economic conditions are moving in the right direction to support a continued slowdown in price growth, while progress on inflation may have “paused” during the first quarter, recent data is pointing to “renewed progress.” Boston Fed President Susan Collins: too high inflation and resilient economy argue for a patient approach to adjusting monetary policy, economy is “resilient.” Richmond Fed President Thomas Barkin: Needs to see more progress in getting inflation sustainably down to 2% target before considering changing interest rates. 

There is not a lot of urgency in the Fed comments and it is notable that so many are pointing to “resilience” in the economy and record low unemployment. But some economists are pointing to risk in keeping rates high for this long. Claudia Sahm, creator of the “Sahm Rule” is sounding the alarm. The Sahm rule is a time-tested recession indicator. Sahm has shown that when the unemployment rate’s three-month average is 0.50% higher than its 12-month low, the economy is in recession. The Sahm Rule stood at 0.37% following the May employment report indicating the unemployment rate rising to 4% for the first time since January 2022. That is the highest the Sahm reading has been on an ascending basis since the early days of the Covid. Next month will mark the 1-year anniversary since the last rate hike. Here are the gaps between the last rate increase and the first rate cut in the last 3 major hiking cycles aka how long the rate was held at its peak (see chart below): 

· 1999-2000 (8 months) 

· 2004-2006 (15 months) 

· 2015-2018 (8 months) 

· 2022-2024 (12 months so far…) 

This fits into the old narrative on the Fed and rate hikes. They keep it up until “something breaks.” It is worth noting that there has not been a Fed hiking cycle that began with unemployment as low as it was in this cycle since 1969/1970. Back to watching the data, the September Fed meeting participants will have 3 more months of CPI, PCE and jobs data to consider, starting with next week’s PCE report. Stay tuned… 

By David R. Pascale, Jr., Senior Vice President at George Smith Partners.