Rate Cuts? Fed Meeting Highlights
Key Take-aways:
- The CPI report on June 12th, 2024, indicates that inflation is slowing down, with month-over-month and year-over-year numbers dropping.
- The Federal Reserve announced they will keep interest rates unchanged for now, with projections showing only one rate cut for 2024.
- Jerome Powell emphasized that the first rate cut often raises expectations for future cuts, but it won’t necessarily lead to immediate economic changes.
- The Federal Reserve is monitoring both inflation and employment, with recent data showing a slight increase in jobless claims and easing inflation.
- Powell highlighted the importance of avoiding past mistakes, such as those in 1979-1980, where premature rate cuts led to a resurgence in inflation.
- Interest rates are unlikely to return to pre-pandemic levels near zero; economists are now predicting a more stable rate between 3.5% and 4.5%.
- The Fed’s dual mandate includes controlling inflation and steering the economy towards full employment, with current data showing mixed signals on both fronts.
- The consensus among Fed members has shifted from three projected rate cuts for 2024 back in March; to an average of one rate cut for 2024 now.
- Core services inflation, excluding shelter, showed its largest month-over-month decline in nearly two years, indicating easing inflation pressures.
- The Fed is likely to wait for sustained evidence of 2% inflation over several months before considering further rate cuts, despite market expectations.
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Rate Cuts? Fed Meeting Highlights – Transcript
Welcome back to the podcast. This is episode number four hundred and seventy-eight. I am Tom Mullooly from Mullooly Asset Management in Walt Township, New Jersey, and let’s get started.
We’re recording this on Thursday, June thirteenth, 2024. Yesterday, June 12th, we had two large data points in terms of economic information. The first was the CPI, the consumer price index, which was reported at 8:30 in the morning.
The number is starting to show that the increase in inflation is really starting to slow down to the point where we are now starting to see a drop in month-over-month and year-over-year numbers. We’re getting to that point where we can speak openly about not only will the Fed cut rates, but when the Fed will cut rates. We’ve been in print and on audio here for the last several months indicating that we believe the Federal Reserve will be cutting interest rates possibly once and possibly not at all.
In calendar year 2024, that seems to now be becoming the consensus that there may be just one interest rate cut for the entire calendar year. But there’s still plenty of people out there who are hopeful that the Fed will start cutting rates in September and through the end of the year.
We don’t know.
One of the things that we continue to rely on is that the Federal Reserve usually cuts rates to stimulate the economy, and this economy right now does not need stimulating. It seems to be growing. The growth seems to be financed primarily by government spending that’s out of control and pretty much reckless, but we still see the economy growing.
The second bit of information that we received yesterday was the end of the two-day Federal Reserve meeting where they announced that they’re going to keep rates for now as they are. Federal Reserve chairman Jerome Powell spent most of his time during the press conference talking about when interest rates may be happening.
He made a couple of points, and I do want to talk about this.
Someone asked him why there is only one cut now in the projections for 2024. So when they talk about these projections, they talk about something called the dot plot. This is pretty much a graph where all of the participants in the meeting, there’s nineteen of them, put a dot on how many rate cuts they see.
Two years ago, it was how many rate increases they see. Right now, the majority of the dots on the dot plot came down to basically one, that there’s going to be one rate cut. He was asked why there is only one rate cut being projected for this calendar year. Powell’s response was, look, one interest rate cut is not going to make a big difference in economic data.
However, it’s usually that first rate cut that tends to get people’s expectations ramped up for additional rate cuts in the future, and that really gets some people excited. So don’t go too crazy over the idea that there may be just one rate cut because once they begin, they tend to go in that direction. It works in the opposite too.
When the Federal Reserve is raising interest rates, they usually don’t raise them once and let it go. They tend to raise rates sequentially for a long period of time. Likewise, they tend to cut rates sequentially for a long period of time.
Another point that came up in the press conference yesterday, Powell explicitly said that the Fed started to get concerned after getting a couple of these reports over the last few months showing that inflation was not going down, that inflation was leveling off. In fact, one of his quotes was three straight good reports doesn’t necessarily mean that a rate cut is coming. The Federal Reserve isn’t just looking at inflation.
They’re looking at a lot of different data points that are out there. Remember, the Fed has a dual mandate. They need to control inflation, and they also need to keep an eye on employment and try and steer the economy towards full employment.
Now one of the things that’s been happening so far the last three months is that we are starting to see some jobless claims numbers increase. These are first-time filers who are losing their jobs. They are now for the first time filing for unemployment benefits.
We’re starting to see some slowdown or at least indications of possible slowdowns in the economy. Doesn’t mean that the economy is going down the tubes overnight or even tonight, this week, this month, maybe even not even this quarter, but it does show that there are some strains in the economy. So we’re seeing overall inflation leveling off, possibly even going down, and we’re starting to see unemployment tick up just a little bit.
One of the things that Jerome Powell said repeatedly during the press conference yesterday, June twelfth, was that a test for the first interest rate cut would be having greater confidence that we’re seeing lower inflation or an unexpectedly weaker job market. And so we’re starting to see both of these happening right now. This morning we’ve got the producer price index report which came out, that also showed inflation is starting to ease.
That’s very good. We’re also starting to see Thursday morning jobless numbers again. They came in about 20,000 higher than what the street was expecting.
He also wanted to emphasize that he doesn’t expect the job market, the unemployment scene, to completely fall apart. He thinks that there could be some further weakness, parts of the recipe that are going into the first interest rate cut. So he also wanted to emphasize during his press conference it won’t take some sort of financial crisis for the Fed to act.
They know when they want to start pulling the trigger when it comes to interest rate cuts. They want to stick to the script. And right now, inflation for the last few months, at least the data, has been a little sticky showing that inflation is still here in the system.
One of the things that the Federal Reserve and Powell in particular want to avoid is what happened in 1979 and 1980. At that point, we saw interest rates going up to the high teens. When we finally started to see a break in the increase in inflation, the Fed was quick to lower interest rates.
Unfortunately, by lowering interest rates, you’re stimulating the economy. While the economy started to get some more stimulation by seeing lower interest rates, it started to pick up again and inflation came right back. And that’s why we had these back-to-back recessions in the late seventies and early eighties.
Powell really wants to avoid that. He’s avoided a recession now over the last two years while interest rates have gone up, which is truly a work of art in my opinion. He wants to avoid us slipping into a recession or, likewise, facing additional inflation just because they started raising interest rates.
The other thing that goes with that is that the neutral long-run rate, the long-term rate, is higher. So Powell said that interest rates are less likely to go to pre-pandemic levels, and that question of how restrictive rates are now has become more pressing in the last few meetings. The point that we want to underscore with you, just trying to translate what he’s saying, is interest rates are not going back to zero.
That was a fluke period of time from 2008 through the pandemic through 2021, where we saw short-term interest rates near zero. We are not going back to that.
And so now people are starting, you know, economists and market strategists are now trying to pick a number somewhere between zero and five percent (where we’re at now on short-term rates) to say where the Fed really ought to be.
If you get three interest rate cuts, that’s seventy-five basis points. That takes us down to four and a half. Short-term rates right now are between five and a quarter and five and a half.
So if we have three interest rate cuts, that takes us down to about four point five percent short-term rates. There are some economists today now saying we could get to three and a half percent. Remember, they’re all predictions, but the idea of short-term interest rates going back to zero is probably not going to happen.
I do think that’s done.
I think that there will still be, you will earn something for short-term money at the bank.
But let’s talk about the historic real rate of return for short-term cash, money in the bank.
Historically, you earn somewhere between one and one point five percent above the rate of inflation. So this is why economists and market strategists are now talking about a three and a half percent rate on money market and short-term things like treasuries. That’s because if the Fed reaches its target of two percent and then you add on one or one and a half percent in terms of a real rate of return, you are now looking at earning three to three and a half percent on your short-term investments.
It seems like a likely scenario. I don’t think it’s going to be happening overnight because I don’t see any impetus for the Federal Reserve to cut rates aggressively. Having said that, we still have great faith that the Fed will be cutting interest rates.
The next move for interest rates will be lower, not higher. At the previous Fed meeting in May, Powell said the next move on rates will be lower, not higher. He said that yesterday at the press conference, we will see lower rates, and that the next move is going to be down, not up.
I honestly could not believe – back in May – that people were interpreting his message that there may possibly be a rate hike in the future. I mean, he never said that and never even intimated that that was going to be happening. So when they polled the nineteen members of the Fed yesterday, here’s how the numbers broke out.
Four people at the meeting projected no rate cuts. Seven members of the Fed were looking for one rate cut. So eleven of the nineteen were looking for no or one rate cut through the end of this year.
Eight, the remaining eight, were looking for two rate cuts this year. What got the market’s attention yesterday was that in March, this number they were projecting one rate cut, this number back in March was three.
The consensus, if you could call it that, of the Federal Reserve members back in March, was that there would be three interest rate cuts this year.
And you’ve got some of these yahoos on Bloomberg in the morning saying “forget about three cuts, they need to do five, six, and sometimes even seven interest rate cuts in 2024!”
There is just no chance (of that happening).
But the big change between March and June is that the Federal Reserve in general as a consensus was looking for three rate cuts in March.
Now a few months later in June, it seems to be they’re projecting the average of maybe one rate cut this year. Again, of the nineteen members, four of them are projecting no rate cuts this year, seven of them are projecting one rate cut this year. The remaining eight see two rate cuts this year.
There is something else that I wanted to mention from yesterday’s consumer price index report. This is the June report, so it’s for the month of May. So the story of May’s CPI report really came down to what’s going on with core services, and more specifically, without shelter prices included.
So core services saw its largest month-over-month decline in almost two years going back to the third quarter of twenty twenty-two. This was also its first negative print in that same time period. While shelter remains very stubborn, those rent prices and owner equivalent rent have not been coming down as much as everyone expected.
The overall inflation picture looks to be easing, primarily for things like this where we’ve seen core services now starting to show negative print when you’re comparing month-over-month numbers from one to the other. This is a very big indicator that what the Fed has been saying they’re looking for, they want to see inflation trending to two percent. And I think the next thing that we have to caution everybody to is we’re not at two percent yet.
In fact, the consensus among the Fed is we’re going to see two point eight percent in core inflation between now and the end of the year. So we’re not at two percent yet. I think the next big discussion for Wall Street economists and market strategists is going to be when we do get, when the economy does reach two percent inflation, two point zero percent inflation, there are going to be a lot of people out there who expect the Fed to cut rates that day.
I don’t believe that’s going to happen. I think the next shoe to drop is going to be where the Fed says, okay, we’ve gotten one month of our target two percent, let’s get three months of this before we go to cut rates. And that will just upset everybody in the market.
But right now, everything is moving, albeit slowly. Everything is moving exactly as the Fed has mapped out.
So continue to stay the course.
I think we’re going to be just fine in terms of the economic story as we move into the second half of twenty twenty-four and into twenty twenty-five. I can’t stress enough that the Fed cuts rates primarily as a tool to stimulate the economy. And right now, this economy does not need stimulation whatsoever.
This has been the message for episode number 478.
Thank you again for your time, and we’ll talk to you again soon.
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.