Optimism for early 2024 rate cuts has been tempered by recent data releases and Fed comments. Last week’s CPI and PPI price reports came in above expectations along with continuing unexpected strength in the jobs market (lower than expected weekly jobless claims for the past 2 weeks). Meanwhile the release of the Fed minutes yesterday revealed policy makers were optimistic but cautious. “Participants generally noted that they did not expect it would be appropriate to reduce the…fed funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent.” They also mentioned that they view some of the recent data on lower inflation is “idiosyncratic” and could bounce back. They were also wary of cutting rates too early.

All this has changed futures markets rate cut expectations over the last month. May 2024 cut odds went from 85% likelihood (30 days ago) to 20% (today). The 10-year Treasury has spiked from 3.87% on Feb 1 to 4.33% today. What’s going on? It could be that the so called “last mile” from 3% CPI down to 2% will be bumpy and slow. Goods prices have come down as supply chains and scarcity premiums have abated, but labor/services costs continue to be sticky. That sector is subject to macro social and demographic trends including labor participation, baby boomer retirements, etc. On the other hand, it is also possible that the December and January data reports are skewed due to a boom in holiday shopping, annual pricing adjustments and other seasonal factors. And don’t forget the lagging shelter cost component (33% of CPI) is expected to drag the headline number down in coming months (we hope). Stay tuned…

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

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