No Time to Cut Rates!
Market Rally Will Add to Inflationary Pressures
Readers of SriKonomics know that I have been writing repeatedly that September would be too soon for the Federal Reserve to ease policy. Data during the past week have done little to dissuade me from that position. On the other hand, market momentum is building in anticipation of the Federal Open Market Committee lowering the Federal Funds rate at the conclusion of its two-day meeting on September 18.
Both equities and long-dated Treasurys rallied hard yesterday after inflation measured by the Fed’s favorite Personal Consumption Expenditure price index held no negative surprises. Should Fed Chairman Jerome Powell provide support for expectations of policy easing at his post-FOMC press conference next Wednesday, expect even higher valuations leading to renewed inflationary pressures.
Data-wise, the week began with figures from the National Association of Realtors on Tuesday that existing home sales fell by 5.4% in June to the slowest pace in over two decades. With sky-high home prices, and homeowners reluctant to sell and give up their low mortgage rates, more and more potential first-time home-buyers are being pushed into the rental market. Shelter has a 36% weight in the consumer price index, and shelter cost has continued to run at over 5% per year in recent months.
This was followed by news on Wednesday that building permits had risen by 3.9% month-on-month in June, a faster increase than had been anticipated. Continued elevated interest rates do not appear to have discouraged building activity.
The big story Thursday was the release of second quarter gross domestic product figures. GDP rose by 2.8% during April - June, twice the pace of the 1.4% advance in the first quarter, and beating a consensus forecast of 2% growth. Consumer spending growth accelerated to a 2.3% pace, consistent with recent strong retail sales figures. The Federal Reserve Bank of Atlanta’s GDPNow measure forecasts GDP will rise by 2.8% in the third quarter — again, not a pace that calls for stimulus in the form of a rate cut.
The most anticipated data-point of the week was yesterday’s release of the Fed’s favorite inflation measure, the PCE index. Investors welcomed the slowdown in annual inflation from 2.6% in May to 2.5% in June, as well as the slower rise in personal income month-to-month from 0.4% to 0.2%. The lower inflation rate was a consequence of falling gasoline prices.
An increase in the cost of fuel stemming from domestic and global factors could be one factor that makes inflation pick up again. Examination of the core PCE, which excludes food and energy, allows us to come to this conclusion. The rise in core PCE month-on-month accelerated from 0.1% in May to 0.2% in June. This was also faster than the 0.1% increase that had been expected. The annual figure showed no change, coming again at 2.6%. No room for comfort in either figure.
Have failed on more than one occasion to come through on their suggestion that interest rate cuts were to follow, senior Fed officials are again encouraging investors to anticipate a policy easing. However, strength in the economy, the still rapidly rising wages, and the still relatively low unemployment rate, all suggest that a cut would be premature and prolong the fight against inflation.
After the failure of Lehman Brothers, then-Fed Chairman Ben Bernanke extolled the virtues of the central bank’s Forward Guidance in enabling a smooth economic recovery from the Global Financial Crisis. But Forward Confusion at the Powell Fed through repeated pivots has prolonged inflation after covid. There is no reason to make it worse.
SriKonomics will not be published on Saturday, August 3 because I will be at a client location. The next issue will come out on Saturday, August 10.
Dr. Komal Sri-Kumar
President
Sri-Kumar Global Strategies, Inc.
Santa Monica, California
srikumar@srikumarglobal.com
@SriKGlobal
July 27, 2024
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