Going into January 2024, the FOMC’s December Summary of Economic Projections (SEPs) had three rate cuts penciled in for 2024, and that projection was confirmed in the March SEPs. In the intervening period between that meeting and the FOMC’s June meeting, a number of developments in terms of incoming data caused the FOMC to reassess the likely policy path through the rest of the year, and it scaled back its expected rate cuts to only one in 2024. Moreover, during the post-meeting press conference, Chairman Powell would not offer an opinion on when that cut might come, if it did, and argued that timing would depend upon incoming data. So, what information might have caused the FOMC to reassess its policy path?
The economy clearly has slowed since the fourth quarter of 2023. Real GDP growth was only 1.3% in the first quarter of 2024, down from 3.4% in Q4 2023. Furthermore, going into the May FOMC meeting, the Beige Books for both April and May suggested that the slowing observed in Q1 had continued into Q2. However, that slowing was not significantly evident in job creation at the national level. The economy created an average of 267,000 jobs in Q1 of 2024 and an average of 218,000 jobs in April and May, compared with an average of 212,000 in Q4 2023 when the economy was growing much faster. Moreover, leading up to the FOMC meeting, new claims for unemployment insurance averaged 212,000 in Q4 2023 compared with 213,000 for Q1 2024. Wage compensation as measured by the Employment Cost Index slowed slightly in 2024, increasing 4.2% year-over-year (not seasonally adjusted), as compared with 4.8% for March 2023, but was equal to the year-over-year increase of 4.2% for December 2023, indicating continued strength in the job market.
Despite the slowing economy and lack of signs of a recession, the inflation story has clearly turned mixed in 2024 after a significant decline during 2023. PCE inflation, which the FOMC is targeting to hit 2%, has, as the chart below shows, moved in the wrong direction in March and April and stands at 2.7%. CPI inflation is even higher and has been much more volatile, bouncing around between 3.1% in January, moving up to 3.5% in March, and declining to 3.3% in May.
Chairman Powell was clear in the post-meeting press conference that the FOMC would have to be confident that inflation was on track toward its target before the Committee would consider reducing policy tightness. When pushed, he declined to speculate on how many months of declining inflation would be needed to create that confidence nor when that might be expected to happen. Given the pattern of inflation we have had so far, it seems that there is no chance for a rate move at the FOMC’s next meeting at the end of July, and we won’t get a new set of SEPs until September. It would probably take three months of declining PCE inflation before a rate cut would be on the table, which pushes the first possible cut until November at the earliest. As Chairman Powell has now repeatedly emphasized, policy will be determined by incoming data and not by forecasts.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
Email | Bio
Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.
Sign up for our FREE Cumberland Market Commentaries
Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
