Change State Economic Update – May 2024

At last week’s FOMC meeting, officials voted to keep interest rates at 5.3 percent. Heading into 2024 the central bank hinted at several rate cuts across the year. But since then, inflation has remained tenacious, and if the labor market refuses to slacken that could delay cuts for several more months. Conversely, evidence that the job market has suddenly cooled could hasten cuts, however “It would have to be meaningful and get our attention and lead us to think that the labor market was really significantly weakening for us to want to react to it,” said Fed Chair Powell, noting that a small increase in unemployment such as we saw in April would not be sufficient to change course.

Mr. Powell does believe the restrictive policy is working however, referencing the slowdown in hiring and declining numbers of workers quitting their jobs. He also suggested that current inflation numbers have remained stubborn despite the slowdown in housing rents, as this is lagging data that has not yet appeared in official inflation measures. The Fed’s preferred measure of core inflation, the core personal consumption expenditures price index, most recently came in at 2.8%. “Of course we’re not satisfied with 3% inflation …[however] evidence shows pretty clearly that policy is restrictive and is weighing on demand,” noted Powell, referencing the recent JOLTS report which shows US job openings at a three-year low.

By and large, most experts highlighted the favorable in April’s report:

• “This is the jobs report the Fed would have scripted […]Today’s weaker numbers need to mark the start of a new slower trend for multiple rate cuts to seriously be back on the agenda, but by then the new fear could be a slowing economy,” said Seema Shah, chief global strategist at Principal Asset Management
• “The more jobs reports you get like this, the more confident we can be that the economy is not overheating,” commented Austan Goolsbee, the president of the Federal Reserve Bank of Chicago
• “One month does not make a trend, but today’s jobs report likely gives the Fed some much-needed assurance that higher rates may be starting to do their job,” noted Jason Pride, strategist at asset management firm Glenmede

Recent Fed commentary aside, some intriguing new data may reveal some skepticism lurking in the senior central banker’s outlook. Powerful words from a powerful seat can have reaching effects, something Bloomberg Economics’ new Fed sentiment index aims to track. Supported by a natural language processing algorithm, the index scans speeches and headlines and scores them on a scale from ultra-hawkish to super-dovish. Bloomberg’s analysis suggests that Powell’s December hints at rate cuts gave markets a boost and even avoided a US recession (!). But with current inflation stuck above goal, Powell has required a sudden change in position. Bloomberg even suggests this December pivot may have avoided a downturn at the price of adding to the inflationary problem (really a thought-provoking read, if you click on just one link today!).

Most experts now predict the Fed will cut rates once, with an upside to twice this year, the first falling in September. Estimates of a September cut sit at roughly 70%, according to CME Group, with an outside chance of 36.6% in July if the labor market plays its cards right.

The next FOMC meeting is scheduled for June 11-12, and we’ll have three more key reports for officials to weigh before their next decision.

“Are there signs that the labor markets are reheating? Not really…The case for weaker inflation is still strong, and until that changes, the Fed should maintain a dovish bias, quite frankly.”

• ​Neil Dutta, head of economic research at Renaissance Macro Research​

(Sources: Economic Policy Institute, The Wall Street Journal, Treasury.gov, The New York Times, MSNBC, The Washington Post, Reuters, Indeed Hiring Lab, AP News, Guy Berger via Substack, Forbes, Fortune, Axios, Bloomberg)