Before no breaks, it was acceptable.
This is uncomfortable.
Breitbart Business Digest was taking a forlorn and contradictory place when we began making forecasts for the Fed’s decision to not cut prices this year and that there was a significant and underappreciated chance that the Fed may raise rates next year. The business was pricing in five or six breaks, and the Fed was projecting three breaks.
Even the most reticent prices birds had a split or two built into their estimates. We were n’t alone in our view, but it was very much outside of consensus.
Then our watch has gone popular. The cover account for this week’s Barron’s warns viewers:” The Fed Won’t Cut Rates This Time”.
Interest rates wo n’t likely be lowered by the Federal Reserve in 2024. Elevated prices, a resilient business, and a nonetheless- powerful, if softening labor market argue against the need for easing economic policy, particularly as these conditions are expected to persist through year end”, writes Nicholas Jasinski, a senior writer at Barron’s focusing on economics and Federal Reserve coverage.
The Fed Won’t Cut Rates This Year https ://t.co/oR8KihIAF6
— Barron’s ( @barronsonline ) May 31, 2024
This leaves us feeling a little like the elementary student who falls in love with an alternate band that no one has ever heard of before discovering six months later that all the well-known kids are sporting group t-shirts. We were into them prior to their amazing!
The current state of the economy is also favorable for reductions.
The argument made by Barron is solid as to why you should expect the Fed to hold its breath and never act decisively. The central point is simply what we have been arguing:” Believe that the Fed’s plan stance has been higher for longer than virtually anyone expected, because the U.S. economy has been stronger for longer than virtually anyone else imagined.”
The Fed’s interest rate plan has had a much lower impact than most academics and financial experts had anticipated. The widely marked slowdown of 2023 not happened, as we properly predicted. Consumer spending is up, and the labour market has remained robust. Consumer sentiment surveys reveal that people are very unsatisfied with the economy, but that is n’t driving them to increase their savings or cut back on spending as a measure of a downturn.
As a result, there’s no pressing want for a price cut. Those who are still urging a split have resorted to calling for the Fed to do some cautious cutting. They point out that the majority of financial data is always backward-looking because it reveals what has happened but not what will occur. They therefore demand that the Fed decide their plan based on what they believe will happen rather than what has or is currently going on.
It’s true that ahead- looking measures —such as the yield curve and the score of leading indicators—tell a grim story about the future. However, they’ve been retelling that tale for almost two years. They serve primarily as a reminder that the economy is operating very differently than it has in the past rather than as indicators of what to expect from them.
Real interest rates, which are interest rates after inflation, are the other main justification for rate cuts. It goes like this: when inflation falls, real interest rates increase mechanically, tightening monetary policy. So, if the Fed does not cut, then real rates are in danger of increasing, causing monetary policy to tighten without Fed action.
The issue with this is that both inflation and inflation rise. Real interest rates decreased at the start of the year as a result of rising inflation. All those voices that were urging us to watch real rates suddenly stopped. You might be tempted to believe that the real rates argument originated with the idea that the Fed should cut rather than be the result of a dispassionate analysis.
Making the Case for Cuts
The current construction spending data should be yet another blow to the notion that the Fed should be cutting more than necessary. While overall spending fell, contrary to Wall Street’s expectation for a small rise, single family home construction—the most interest rate sensitive segment of building—ticked up a tenth of a percentage point. Compared with a year ago, it is up 20.4 percent.
( Photo: Jens Behrmann/ Unsplash )
What’s more, there’s clear evidence that government spending is still stepping on the economic accelerator. Construction expenditures for manufacturing plants increased by 0.9 percent in April and by 17.1 percent from the same period last year. This is largely attributable to spending that is promoted and subsidized by the CHIPS Act and the Inflation Reduction Act.
Yet the allure of rate cuts remains. The Fed will cut three times this year, starting with a cut in September, according to Morgan Stanley, which it reiterated on Monday. Even though the market views that as a stretch, the Fed is still pricing in two cuts this year, with better than any chance that the Fed will make the announcement at the meeting in September, just eight weeks before the election day.
This provides us with some comfort that we’re still safely contrarian—even if Barron‘s now agrees with us. And the data continue to support our fundamental convictions.
