Fed Official Talks Rate Cut, Tarriff Pause Uncertainty, Economic Headwinds (?)
Cleveland Fed President Hammack remarked that the Fed could cut rates in June “if we have clear and convincing data” by then. Fed futures for a June quarter point cut are at 60% and an 82% chance of three or more cuts by year-end. The Data: This week’s jobless claims report indicated continuing solid labor demand (for now). The Fed will be watching for job market weakness and any economic slowdown indications. Some metrics are flashing warning signs: The Fed’s Beige Book survey released this week is a first detailed look at consumer and business tariff concerns. Tourism and hospitality demand is softening (post-COVID demand is ebbing, geopolitical tensions, leisure budgets are being pulled back). Consumer confidence (U of Michigan index) dropped for the 4th consecutive month and is the lowest since July 2022. Hair/nail salon services trade group reports customers are taking longer between visits. Chipotle customers are pulling back on eating out. A social media movement called “#nobuy2025” is gaining steam as participants extol the virtues of reigning in “unnecessary” spending.
One aspect of the Fed survey found consumers and businesses unsure of how it will “play out”. Example: Many import businesses are deciding whether to pass on tariff increases to their customers or hold the line on pricing in order to retain market share, “eating” some or all of the increases (lower profits). Much of the breadth and scope will depend on negotiations with major trading partners, especially China. Tariff concerns are “distorting” consumer behavior. Example: Durable goods orders spiked as many consumers engaged in “frontrunning” by rushing major purchases (such as automobiles) in late March or early April. Note that “core” orders were down, signaling future weakness and uncertainty. April numbers will be volatile and outliers; May will depend on how—and if—things settle, providing policymakers with some direction in June. Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners.