Powell: Key Points from May 2024 Federal Reserve Meeting
Key Takeaways from Chair Powell and the May 2024 Federal Reserve Meeting:
1. **No Immediate Rate Hikes**: The Federal Reserve has indicated that there are no upcoming rate hikes in the near future. This decision is based on the current economic policies which are not considered restrictive.
2. **Dismissal of Stagflation Concerns**: Fed Chairman Powell dismissed concerns about stagflation, citing that the current economic conditions do not reflect stagnant growth combined with high inflation. The economy is growing at about 3%, with inflation also around 3%.
3. **Apolitical Stance on Rate Decisions**: The Federal Reserve maintains an apolitical stance regarding its decisions on interest rates, emphasizing that decisions will be based solely on economic needs rather than political timelines, including the upcoming presidential election.
4. **Data-Driven Policy Adjustments**: The Fed will not make abrupt policy changes based on single data points. Their approach is to adjust policies as needed, based on a comprehensive view of economic conditions.
5. **Conditions for Rate Cuts**: Two potential paths to future rate cuts were identified: sustained inflation at around 2% or a significant weakening in the labor market.
6. **Rental Market Observations**: There is a notable shift in the rental market, with increases for first-time renters slowing significantly, while renewal rates continue to rise, potentially influencing inflation measurements due to the weight of rent in the consumer price index.
Powell: Key Points from May 2024 Federal Reserve Meeting – Links
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Powell: Key Points from May 2024 Federal Reserve Meeting – Transcript
Welcome back to the podcast. This is episode number four hundred seventy-seven. This episode is being recorded on Thursday, May 2, 2024, in the year of our Lord, amen.
I want to use this opportunity to recap the highlights from the Federal Reserve meeting that concluded twenty-four hours ago on Wednesday, May 1. For twenty-four hours now, we’ve heard the news that the Fed is leaving interest rates unchanged from the previous meeting.
There were a few key takeaways from this meeting that I think are worth discussing.
There are six points that I want to focus on.
The first point, and probably the most important, is that there are no rate hikes coming anytime in the near future.
Amazingly, there had been plenty of rumors, gossip, and speculation that the Fed’s next move might be to raise rates to try and combat this persistent inflation. So, during the press conference, which happens about thirty minutes after the announcement each time, Fed Chairman Powell was asked if rates might need to be hiked again, and his answer was immediate and right on the spot.
Powell said it’s unlikely the next move would be a hike, and then he followed it up with this comment: “We would need to see persuasive evidence that the current policy that they have in place is not restrictive.”
A source that I used to put my notes together for this podcast is someone who I feel is an excellent follow on Twitter, or if you prefer, X. There’s a woman named Callie Cox. You can find her on Twitter. She wrote, “Hey, this implies that rates won’t be moving up.” And in her mind, that also implies that things like mortgage rates, auto loans, and any other type of loans are probably peaking right around these levels. Important for the consumer to keep that in mind.
The second point that I want to focus on is a phrase that Powell said during the press conference yesterday. When asked about stagflation, he said, “Well, I don’t see any stag, and I don’t see inflation.” The actual quote from Powell was “no stag, no inflation.” Stagflation, a term we’ve had kicking around for about fifty years or so, refers to a stagnant economy with persistent inflation. Interestingly, we’ve kind of Americanized that phrase.
Stagflation was a phrase that was used back in the 1960s by a British politician, Ian McLeod, who later became Chancellor of the Exchequer in 1970. He was referring to the slow, stagnant economic growth that they had in the UK and consistent or persistent inflation.
Powell talked about this yesterday and pointed out that look, we’ve got an economy that’s growing at about three percent. From the Bureau of Economic Analysis, we find the fourth quarter 2023 gross domestic product, how the economy grew, came in at 3.2 percent for the fourth quarter of 2023.
The preliminary number for the first quarter of 2024 was 1.6, but Powell and many others feel that this number is going to be increased as they go through modifications in the coming weeks. So Powell pointed out that, we’ve got an economy that’s growing at three percent. We’ve got inflation at three percent.
When we were talking about stagflation fifty years ago, we were talking about economic growth of zero or one percent, with inflation seven, eight, nine, ten percent—very different set of circumstances now. So, don’t see stagflation hitting anytime soon.
Powell was also asked, moving on to the third point, whether the Federal Reserve would take the upcoming presidential election into consideration about the timing of rate cuts. Powell’s response was, “Look, we’re apolitical.”
Meaning, if the economy needs a rate cut, they will cut.
Although history has shown they usually don’t tend to act around election time. We’ve got an upcoming election on November 4th (actually November 5th). We’ve got upcoming meetings. The next few meetings we’ve got are June 11-12, July 30-31. They meet in September, September 17-18, and then they meet right after the election, November 6-7, and then another one in December, right before Christmas, December 17-18.
Plenty of chances for them to take action if they decide that is the path they want to take. We’ve been saying for many months now we don’t see a need for the Fed to cut rates. The economy is moving just fine. I think more people are starting to tune into the idea that rates are going to be higher for longer.
The fourth point that I want to emphasize from the Federal Reserve’s actions and the press conference from yesterday was that one set of data points isn’t going to get the Fed to pivot, change directions, or move quickly. Powell said, “Policy is well-positioned to address different paths the economy may take.” They’re ready to go at whatever pace or whatever is needed now in the economy.
And something else that I’ll just add on top of that is unlike situations in the last ten years, if the economy was showing signs of faltering, the Fed didn’t really have any room to cut rates. They’ve got plenty of room now to cut.
The fifth point I want to highlight from the press conference with Chair Powell yesterday, he said something very interesting. There are two paths to rate cuts. The first is if inflation finally reaches a sustained level around two percent. The second path to rate cuts would be an unexpected weakening in the labor market.
People start losing jobs, and the Fed’s going to need to step in and take some action. And we are starting to see some anecdotal evidence that things are starting to fray for the American consumer. We’re going to touch on that in a moment.
The sixth point that I wanted to highlight from the press conference yesterday. Chair Powell briefly talked about rents and rent prices or rent increases. He noted how historically, first-time renters, when you move into a new rental agreement, you usually have a pretty big increase in your rent.
On the other hand, repeat tenants (renewals), often see smaller increases. At least historically, that’s been the case. It’s not so much happening right now.
The amount of increases that we’re seeing for first-time renters, someone who’s moving into a new location, is dropping, and it’s dropping drastically by comparison. And these were some data points posted by Bill McBride, who writes at www.calculatedrisk.com, another excellent website you should check out.
They posted information from Invitation Homes. If you are unfamiliar with the name, Invitation Homes, is the largest homeowner company in the United States. They own homes, and they rent them. So, if we go back two years ago – to the second quarter of 2022 – the increase in rent for new leases was over sixteen percent.
So basically, if there were an apartment that was renting for a thousand dollars, the next tenant that came in would be signing a lease at eleven hundred sixty dollars, an increase of sixteen plus percent.
By the third quarter, just three months later, the increase was fifteen percent.
But by the end of 2022, the increase now was seven percent.
There is no increase to speak of now in the first quarter of 2024, it’s less than one percent.
However, something interesting is happening on the renewal side.
In 2022, when a new lease was begun, they saw a typical increase of about sixteen percent. Renewals were renewing at about a ten percent increase (in rent). And that number stayed pretty consistent all through 2022.
Now that we’re seeing new leases being signed with virtually no rental increase, but we are seeing renewals with increases of five, six, seven percent. And so, new tenants have seen pretty sharp deceleration in the increases when they’re signing a new lease. But we’re still seeing renewal rents rising at a pace that’s higher than inflation overall.
Remember, we’ve got inflation at three percent. But when your lease gets renewed, and you’re paying five, six, seven percent higher than you did before, that really matters.
Why does it matter, however, to Jay Powell and the Federal Reserve?
You need to know that rent – and OER – the owner equivalent rent (basically what would it cost if you were to rent out your home), this rent component is one of the largest pieces when they’re calculating the consumer price index, when they’re calculating inflation. Rent is a sizable chunk of that number.
And so, this is one of the things that a lot of economists, including economists at the Federal Reserve, have been saying: we’re going to see a drop in rental increases quarter to quarter and year over year. But some of this (inflation) is becoming really sticky, and we’re not seeing the drop – or the amount of the drop that some were expecting.
I’ll repeat what we’ve said in many of our weekly emails, of late, and on a couple of different podcasts and videos.
Remember, the Fed historically cuts rates when the economy needs to be stimulated.
And at the present time, this economy doesn’t need any stimulation.
Unfortunately, the areas of growth that we’re seeing continue to be, the source continues to stem from, massive government spending.
And that’s deficit spending at that.
We’re seeing less and less contribution from the consumer. This week alone, we saw evidence of that from McDonald’s and Starbucks.
These are two good examples where a company can raise their price, and raise their price, and raise their price consistently — until they finally reach a level where the consumer turns away. And starts looking for alternative places to buy a similar product, a cup of coffee, a hamburger, you get the idea.
When the consumer gets fully tapped out — and, or — when we see an increase in unemployment, the Fed’s going to be ready to act.
I don’t really see the need, and we have said this before… We don’t really see the need for multiple rate cuts this year. But there are plenty of people in the market that use rate cuts as a sugar high, or crack. In the sense that “hey, if we get the Fed to begin lowering rates, that will free up capital, it will encourage more risk-taking.”
Lots of other things get triggered when the Fed is easing.
I think we’re getting really close to cut, but we’re not quite there yet.
And so, we’ve gone through the May Federal Reserve Meeting this year. The next one, as we said, comes up in the middle of June, June 11-12.
We’ll see what the Fed is ready to do. We’re going to stay with one – or no – rate cuts this year.
This has been episode four hundred seventy-seven. We appreciate you tuning in as always, and we will catch up with you on the next episode.
Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.
