The Federal Reserve’s latest monetary policy decision will probably be announced next Wednesday. Markets largely expect the Fed to hold rates regular at its July meeting before eventually cutting in September since the case for alleviating policy mounts.
Inflation has shown signs of slowing in recent months. In June, the core Personal Consumption Expenditures (PCE) index, which strips out the associated fee of food and energy and is closely watched by the Federal Reserve, rose 2.6% over the prior 12 months, its lowest annual increase in greater than three years. Separate data for the month showed a significant decrease in a single other inflation metric, the Consumer Price Index (CPI).
Meanwhile, the labor market has shown signs of cooling. The ratio of job openings to unemployed employees is back at pre-pandemic levels, and last month, the unemployment rate hit its highest level since November 2021.
Seven charts in volume three of the recently published Yahoo Finance Chartbook make the case for the Fed to cut rates of interest by the tip of its September meeting.
The case for cutting rates
David Kelly, chief global strategist, JPMorgan Asset Management Market Insights Team
“Stubborn inflation in the midst of the primary quarter dashed hopes for aggressive policy easing this 12 months. That said, inflation stays below its June 2022 peak, and disinflationary momentum has regathered steam in recent months. The reality is, headline inflation rose by just 3.0% y/y in June, well below the three.5% pace recorded just three months prior.
“While food and energy prices have been well-behaved and core goods have been a delicate source of disinflation, gains in shelter and auto insurance have remained elevated, prolonging inflation’s journey back to the Federal Reserve’s 2% goal. Nonetheless, with real-time data across each categories pointing to easing price pressures, inflation should proceed its slow descent and return to 2% by the middle of next 12 months. If, as expected, inflationary pressures ease through the summer, the Federal Reserve should feel comfortable cutting rates twice this 12 months, delivering a primary cut in September.”
Goldman Sachs economics team led by Jan Hatzius
“Contrary to the predictions of some distinguished economists but consistent with our own work and that of Fed Governor Christopher Waller, the normalization of the US labor market in the course of the last two years has occurred in a extremely benign fashion, with a giant decline throughout the job openings rate and only a negligible increase throughout the unemployment rate. Inside the jargon of labor economics, we now have moved down the steep post-pandemic Beveridge curve and are back to the flatter pre-pandemic Beveridge curve. This suggests we is also approaching an inflection point at which further softening in labor demand ends in a much larger and much less welcome increase in unemployment.”
Brett Ryan, senior US economist, Deutsche Bank
“A really powerful chart — and the impetus for the change to our [call for a September rate cut] — is essentially the most recent rental inflation data from [this month’s] CPI release. The drop in primary rents and owners’ equivalent rents throughout the June CPI data is a ‘game changer’ and can meaningfully boost Fed officials’ confidence that inflation stays on a trajectory back to its 2% goal. To be certain that, the Fed will likely must see a pair more prints to confirm the downshift, but historically, rents have been fairly sticky — i.e., when you could possibly have a shift in either direction from [a] prior trend, it tends to persist.”
Mark Zandi, chief economist, Moody’s Analytics
“Inflation, as measured by the harmonized consumer expenditure deflator, is firmly below the Federal Reserve’s 2% goal. Harmonized inflation excludes the implicit cost of homeownership, also generally referred to as owners’ equivalent rent. Measuring OER is vexed in typical times but is intractable in current times given the upside-down housing market. It’s comprehensible the Fed doesn’t need to alter the inflation measure it’s targeting for the time being and risk its credibility, but Fed officials should call out harmonized inflation as critical to watch. By so doing, it’ll make it easier for the Fed to make the case that inflation is where it should be for them to do the correct thing and lower rates of interest.”
Gregory Daco, chief economist, EY
Given unfavorable year-on-year comparisons, PCE inflation is more more likely to hover around an ‘uncomfortable plateau’ around 2.6%-2.7% over the summer. While softer consumer spending growth due to increased pricing sensitivity, moderating wage growth, declining rent inflation, reduced markups, and stronger productivity growth will proceed to produce a healthy disinflationary impulse, it just isn’t until September that inflation readings will fall below that uncomfortable plateau. We foresee headline and core PCE inflation ending the 12 months around 2.5% [year over year].”
Michael Gapen, head of US economics, Bank of America Global Research
“We expect the contribution from fiscal [policy] to the expansion rate of the US economy should moderate over time, down from the substantial contributions it made throughout the last six quarters. And, to a lesser degree, business spending should follow the similar path. This is a component of the rationale we assume growth moderates and inflation decelerates.”
John Silvia, CEO and founder, Dynamic Economic Strategy
“The Fed, Powell, and others have cited these series as benchmarks for easier labor market conditions. These two series support the argument the Fed will ease in September.”
Click here to download YF Chartbook Vol. 3 (Open link in recent tab on desktop)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer. Have thoughts on volume three of the Yahoo Finance Chartbook? Email him at Josh.schafer01@yahoofinance.com
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