Economic Update: Rate Cuts to Be Shelved by the Fed

Economic Update: Rate Cuts to Be Shelved by the Fed

May 10, 2024

Since the middle of 2022, the ongoing question has been when the Fed would begin to cut interest rates. Recently released data shows that inflation has continued to be persistent but not with enough of an increase to prompt the Fed to take action. Most—if not all—market participants have pushed out the expected date of the first rate cut to September.

Economic Update: PCE and Core PCE

As of May 6, 2024, both the CPI Report (Consumer Price Index) and the PCE Index (Personal Consumptions Expenditure Index) indicate that inflation has remained sticky. Headline PCE was 2.7% year-over-year while the core PCE was 2.8% year-over-year as both headline and core PCE monthly levels remained unchanged. 

When using the last three months’ data to project forward, we anticipate an annualized headline PCE of 4.1% and a core PCE of 4.5%. This is due to a pick-up in inflation for both Durable and Nondurable goods while Services remain steady. In other words, the decline in inflation that was seen in the last 2 years was mostly due to deflation in goods, which has now stopped. Digging deeper into the components of PCE, there has been a general upward trend in recent months.

The Fed mentions in their communications wanting to see sustainable downward movements in inflation toward their target of 2%. The general strengthening of all the major components is not in line with the Fed’s desires.

Personal Income

The PCE report Real (inflation-adjusted) Disposable Income was up only 1.4% for the year. Using a similar projection of the last three months data as with the PCE, the US Real Disposable Income growth would be 0.4%. While the Fed does not explicitly talk about inflation-adjusted wealth or income, it is likely part of their deliberations. Chairman Powell mentioned in the press conference after their latest meeting how they recognized the pressure that inflation is having on household wealth.

Other Economic Indicators

Three recent pieces of news recently came out that might indicate future disinflation.

First – GDP

GDP for the first quarter came out at a 1.6% annual rate. The lower rate was due to weakness in trade, inventories, and government purchases. Consumer spending, home building, and business fixed investment were all healthy and made up the more stable part of economic growth. 

Second – Nonfarm Payrolls

Nonfarm payrolls were released on 5/3/2024 at 175,000the lowest in 6 months— which was both below expectations and below the average of 234,000 per month for the last 12 months according to the data provided by YCharts. The decline also caused the unemployment to rise to a still healthy 3.9%.

Third – ISM Manufacturing and Services

Both ISM Manufacturing and Services fell slightly into contraction territory with readings of 49.2 for ISM Manufacturing and 49.4 for ISM Servicesany ISM Services reading below 50 is considered to be in contraction. 

Monthly Data Recap:

With recent numbers indicating a weakening of the economy—but nothing to indicate a recession—and positive job growth, it seems reasonable that the Fed will continue to focus on inflation by holding rates steady. They seem to continue to want clear evidence that inflation is moving downward, so the current expectation of delaying a rate cut until September is reasonable. However, should inflation be persistent, it would not be a surprise if the Fed holds rates steady throughout the year.

Contact our trusted wealth management advisors with any questions.

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© 2024 REDW Wealth LLC. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice. Information and instruction shared in the article above do not guarantee outcomes, performance, or quality of services provided to REDW Wealth Management clients by REDW Wealth Management or its employees. Adherence to our fiduciary duty is not a guarantee of client satisfaction or any particular outcome. Advisory, Assurance, and Tax is offered through REDW LLC. Wealth Management is offered through REDW Wealth LLC.

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