How soon is soon? Or exactly how much later is later?
Going into the year, there was a widespread view among economists and on Wall Street that the Federal Reserve would lower interest rates in the first half of the year. Maybe in March, maybe in May, but sooner rather than later.
That long-awaited moment, two years after the Federal Reserve began raising rates to their highest level in decades, offered the prospect of improving consumer confidence, boosting company valuations and improving corporate financing opportunities. It was called “the pivot party” and everyone was invited.
But three months of better-than-expected inflation data followed. Financial markets then projected that the Federal Reserve would lower rates once, near the end of the year, or never, based on the view that the central bank will see little merit in such a move as long as inflation remains somewhat elevated and the employment is growing.
Interest rates on home and car loans rose again. And it looks like the pivot party has been cancelled. But some experts maintain it has only been postponed, leaving forecasters divided over what the rest of the year will hold.
Field 1: Inflation is under control
Some market analysts and banking economists maintain that rate cuts are still on the table. The April jobs report, which implied a cooling labor market and weaker wage growth, gave them some fodder.
These analysts generally maintain that current inflation measures are overstated due to lagging indicators, reflecting cost pressures from more than a year ago, which will ease in the summer. And they believe that while the diffuse process of price stabilization, formally called disinflation, may face setbacks (especially any oil shock), it is on the right track.
The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures index, rose 2.7 percent annually in March, well below its peak of 7.1 percent in June 2022. However, this There has been slower progress this year on that measure and in the more high-profile consumer price index. notable and frustrating efforts to meet the Federal Reserve’s official goal of 2 percent.
Skanda Amarnath, executive director of Employ America, a labor-focused group that tracks inflation data and Federal Reserve policy, was originally among those expecting a rate cut in the spring. In a recent bulletin, he said the first quarter “was filled with a series of upside inflation surprises” – from well-known potential trouble spots like auto insurance to obscure ones like management fees for financial advisors – but “That does not mean that the disinflationary effect The process has come to an end.”
“We remain optimistic,” Amarnath said, adding that recent deviations in inflation “are ultimately marginal” and that “the first reduction in interest rates will likely come in September.”
Research teams at a pair of Wall Street’s most influential firms also maintain faith in gradually cooling inflation and a series of rate cuts to come.
On the question of cuts this year, “we remain optimistic in our bet on three,” Morgan Stanley’s U.S. research team, led by Ellen Zentner, said last week in a note to clients, “but we are delaying the start until September.” .”
Goldman Sachs expects two rate cuts this year: one in July and another in November.
These calls are based on the idea that, while the winter pivot party may have been too exuberant, the pessimistic commentary of late has been overblown.
Field 2: The labor market is still too hot
Corporate earnings calls over the past month showed that a variety of companies are losing sales due to inflation-weary customers who have become more demanding. But others, flush with raises or investment income, are spending money on more expensive services and goods.
Supply chains and energy markets have stabilized after being hit by the pandemic and war in Europe, easing some of the pressure on prices. But the Fed hasn’t “done enough to really kill the consumer and result in that slower demand-side inflation,” Lindsey Piegza, chief economist at Stifel Financial, said in a recent interview with CNBC.
The inconvenient truth, according to a common view among finance professionals, is that this period of unusually low layoffs may have to end for wage growth and, ultimately, inflation to be fully controlled.
“Working conditions remain strong; there is no reason to believe that inflation will slow materially towards the end of the year,” argued José Torres, senior economist at Interactive Brokers.
The booming economy, he said, is “creating structurally higher wage costs” for employers, who still choose to respond to that cost by raising prices when they can. That, Torres concludes, makes the path toward the Federal Reserve’s inflation goal “almost impossible right now without an increase in unemployment.”
He believes the Federal Reserve will begin cutting rates no earlier than next year.
Most economists who analyze the data agree that the continued willingness to pay for more expensive things (or “price insensitivity”) partly explains the persistence of inflation.
Torsten Slok, chief economist at Apollo Global Management, has said the upper middle class and wealthiest are driving price increases for services specifically and inflation generally, even as several companies report their lower-income customers are cutting back. your expenses, looking for deals and trading them down to save.
He projects there will be little progress in upcoming inflation readings and no rate cuts from the Federal Reserve this year.
“Due to the significant rise in the stock market and significant cash flows” from bonds and high-yield savings accounts, Slok said in a research note, “American households have more money to travel by plane, stay in hotels , eat in restaurants, go to sporting events, amusement parks and concerts.”
The wild card: housing costs
Morningstar, a financial services company, “still expects inflation to essentially return to normal in 2024” and interest rate cuts in early fall, said Preston Caldwell, the company’s chief U.S. economist.
That call, he said, is based largely on the expectation that government measures on rent inflation (which have lately been responsible for a large majority of above-target inflation) will soon align with recent private sector readings. , which have been softer.
“Leading data still points strongly to an inevitable decline in housing inflation,” Caldwell said, “although the exact timing remains somewhat uncertain.”
Assessing the direction of an important element of the Consumer Price Index known as homeowners’ equivalent rent (an estimate of what homeowners, who make up two-thirds of households, would pay if they rented their homes) has bedeviled forecasters. Since early last year, a variety of experts have been incorrectly guessing when it will disappear as an inflation factor.
Harvard economist Jason Furman characterizes homeowners’ equivalent rent as “the implicit rent you owe each month as a homeowner.” This tends to confuse homeowners, especially those with a fixed mortgage payment, who view their home as an asset, not a service they provide to themselves. It has become a point of controversy among experts.
In the latest reading, the Consumer Price Index put inflation at 3.5 percent over the past year. An alternative measure (used in other major developed nations and which does not include landlords’ equivalent rent) indicates that the U.S. economy has been hovering just below or above the Federal Reserve’s inflation target since June. But virtually no one expects officials to change the inflation measures they have chosen this cycle.
Therefore, a wait-and-see approach prevails, and in the meantime high rates persist. And the timing of sooner or later remains as ambiguous as ever.