Meanwhile, in more encouraging news, consumer confidence is rising
Yesterday, we learned that U.S. consumer confidence rose unexpectedly in May.
This is the first time in four months that shoppers reported feeling rosier about economic conditions.
From Bloomberg:
The Conference Board’s gauge of sentiment increased to 102 from an upwardly revised 97.5 in April, according to data out Tuesday. The reading beat all estimates in a Bloomberg survey of economists.
Not only was this the first climb in sentiment since January, but the measure jumped by the highest rate since last July.
Now, it wasn’t all good news.
Back to Bloomberg:
Despite the increase…with the Federal Reserve keeping interest rates at a two-decade high, voters are generally downbeat on the economy ahead of November’s election.
That was especially illustrated in Tuesday’s report as consumers’ perceived likelihood of a recession in the next year rose for a second consecutive month.
The risk is that if consumer beliefs about the likelihood of a recession become too sour, it would result in reduced spending as shoppers batten down the hatches. Of course, it’s that reduced spending itself that would usher in the very recession that’s feared.
While we’re on the topic of interest rates, yesterday brought the latest chatter on the potential timing of the first rate cut
It came from Minneapolis Federal Reserve President Neel Kashkari in an interview with CNBC.
When asked what would be needed for the Fed to cut rates, Kashkari said:
Many more months of positive inflation data, I think, to give me confidence that it’s appropriate to dial back.
“Many” suggests September is the first month that fits the bill. This echoes what we heard from Federal Reserve Governor Christopher Waller last week:
The economy now seems to be evolving closer to what the Committee expected.
Nevertheless, in the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy.
If we look at the CME Group’s FedWatch tool, a cut in September is now a coinflip.
As you can see below, the probability of the Fed holding rates holding steady at today’s target level of 5.25% - 5.50% clocks in at 51.9%. Meanwhile, the odds of a quarter or half point cut measures at 47.6%.
While it’s a tossup today, the trajectory of expectations has been moving in a hawkish manner. Last week, the odds of at least one quarter-point cut in September came in at 65.3%.
Keep your eyes on Friday. That’s when we’ll get the latest data on the Personal Consumption Expenditures (PCE) price index from April.
This is the Fed’s preferred measured of inflation, so it has the potential to move the markets, as well as forecasts about rate-cut timing.
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Let’s end with a thought exercise about rate cuts
What if, to stave off inflation, the Fed needs to cut rates?
Yes, you read that correctly.
The going belief is that high interest rates are what’s needed to throw cold water on the economy. But what if, this time around, we have things backwards? Is it possible that today’s high rates are actually inflationary?
Here’s Bloomberg explaining this idea from BlackRock’s chief investment officer of global fixed income, Rick Rieder:
The best way for the Federal Reserve to temper inflation will be to lower rates, not hold them higher.
That’s because well-heeled Americans are earning more than they have in years from fixed-income investments, given that benchmark rates remain on hold at their highest level in a generation…
[Rieder said] “In fact, I would lay out an argument that actually if you cut interest rates, you bring down inflation.”
Consider these “well-heeled” Americans...
Most of them are older and own homes with mortgage rates locked in around 3%.
Today, with high-yield savings accounts paying out over 5%, they’re enjoying a positive spread above their mortgage. Potentially, that’s some significant disposable income.
If the Fed cuts rates, this spread decreases or disappears. And theoretically, that’s less money sloshing about the economy.
Now, the question is what’s the inflationary tradeoff between lower rates that, historically, spur economic activity overall, versus lower rates that would decrease fixed income payments for these well-heeled Americans, resulting in less buying from them?
Well, one variable to analyze would be how much of consumer spending comes from these well-heeled Americans versus everyone else.
On this note, here’s AP News:
…As the huge baby boom generation has aged and, on average, has accumulated more assets, they have accounted for a rising share of consumer spending.
Americans ages 65 or over supplied nearly 22% of consumer spending in 2022, the most recent year for which data is available. That’s the highest such figure on records dating to 1989, up from about 16% in 2010.
That’s a lot of spending from the boomers, but still, just 22% of total activity.
So, is it time for the Fed to fight inflation by slashing rates?
I suspect that won’t be Jerome Powell’s takeaway.
But this does help shine a light on at least one reason why economic activity remains robust while so many Americans are barely making ends meet today.
Have a good evening,
Jeff Remsburg
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