As clever economists, analysts, and others try to determine when the one rate cut by the US Federal Reserve will occur this year, they should keep in mind that we are only one poor monthly inflation reading away from having no rate cuts in 2024.
Even though the May consumer price data was slightly lower than expected, which Chair Jay Powell acknowledged was part of the decision to leave rates unchanged this week, a repeat of the small rises seen in March and April could push the first rate cut into 2025.
If inflation drifts along at current levels, that will not be enough to convince the Fed to adopt a rate-cutting stance, as Powell made clear. Powell stated during Wednesday’s news conference that policymakers are still looking for “greater confidence” that inflation is moving sustainably to 2% before they make a change.
The job market remains solid, as confirmed by last week’s May figures. The rise in the jobless rate to 4.0% (actually 3.96%) aligns with where the Fed sees unemployment for the rest of this year and into 2025, when it could rise to 4.2%. To the Fed, this indicates a strong job market and no reason to cut rates.
In his media conference on Wednesday, Powell suggested that policymakers were ready to cut rates if either the labor market weakens unexpectedly or inflation falls more quickly. These are the traditional reasons for rate cuts (and the reverse holds true for rate increases, as we have seen with inflation, but not the job market, which remains stubbornly strong).
The signs in the CPI data were positive. The consumer price index for May was unchanged after rising 0.3% in April. The core measure, which excludes food and energy prices, rose 0.2% — the slowest monthly pace since August 2021. Year-over-year inflation edged down as well, to 3.4% from 3.5%, and core CPI was up an annualized 3.3% over the past three months, the slowest since October.
The so-called core core inflation reading (excluding petrol, food, and shelter components of the CPI) was up just an annual 1.9% in May. That’s inflation outside of consumer activity and homebuilding.
In its latest forecasts, the Fed predicts headline PCE inflation (the central bank’s preferred measure) will rise 0.2 points to 2.6% this year, with core PCE inflation up 0.2 points to 2.8%. The bank’s economic growth estimate for 2024 remains unchanged at 2.1%, easing to 2% next year. Unemployment is expected to stay steady at 4.0% and rise to 4.2% in 2025.
Thursday’s producer price index was better than expected, showing a small drop instead of the forecast small rise, and much lower than April’s large 0.5% rise. With oil prices weakening, there could be weaker inflationary pressures in the US summer, especially from petrol prices, which are also weaker now.
The only hint of concern about the wider economy was the sharp rise in initial unemployment benefit claims last week to 242,000, the highest in 10 months. If that continues, it will signal that repeated small cuts are starting to affect employee numbers.
But the US is looking at a fairly solid economic outlook midway through 2024, with no need to cut rates and certainly no need for an increase. Powell made clear that no one among the 19 members of the Open Market Committee supports a rate rise.
Confirming the Fed’s optimism, the World Bank raised its global GDP growth forecast for 2024 from 2.4% to 2.6% and raised the GDP growth forecast for the United States from 1.6% to 2.5% — a significant revision for America.
