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How Many Fed Rate Cuts to Expect (And Who Not to Listen To)

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This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.

 

What do we do about people shouting about a U.S. recession?

 

With a 4.2% U.S. household unemployment rate in hand, relatively low levels of housing inventory for sale and a GDPNow model estimate at +2.5% for a Q3 that is three weeks from over, here’s what we do: 

Call them untrained propagandists!

Consider the following FRED chart, revealing a boom in Total Construction Spending on Manufacturing in the United States:
 

St Louis Federal Reserve
Image Source: St Louis Federal Reserve


Expect this rhetoric to get worse, by the way, on the way to a Nov. 5th Presidential election.

Want to know the basic problem with U.S. macro news in 2024?

This should be termed “the full maturation of an aggregate supply expansion, dating back to 2H-2020.”
 
The U.S. economy has enjoyed roughly four years of U.S. aggregate supply expansion.

We have now a period of full-employment in the U.S., one that is currently leveling off.
 

Remember when your resident “perma-bear” brought up the Mainland China aggregate supply struggle? You don’t!


A struggle with real GDP growth is found there, though.

A global pandemic supply shock led to a period of on-shoring, with logistics and shipping re-sets favoring domestic suppliers.

Global and domestic suppliers, other than Mainland China, benefited.

This time around, watching U.S. and global aggregate supply expand — out of full health policy repression — bears no resemblance to any aggregate demand cyclical adjustment.

That Mainland China struggle with aggregate supply expansion is the current notable struggle in this context.

What is being priced into long-term U.S. Treasury bond markets (at 3.62%) is consistent with what is being priced into WTI oil prices per barrel (at ~$67).

I would suspect that is a tied, dual global effect seen from Mainland China deflation and growth reduction in 2024. Then, expect it to continue to get worse across 2025.
 

What about the policy rate-cutting prospects for the FOMC, going out across 2025?


There are three sources for pegging a U.S FOMC policy rate-cutting consensus down:

(1) The latest London Bank/Economist consensus looks for seven 25 bps cuts by Dec. ‘25.

The August 2024 London Consensus Economics Fed Funds mode had 5.105% in Sept. ’24, 4.686% in Dec. ‘24 and 3.602% in Dec. ‘25.

(2) The FOMC shows us nine 25 basis point rate cuts are likely coming:

The current Fed Funds Effective Rate of 5.33% falls to an FOMC Summary of Economic Projections Median Rate of 3.1% by the end of 2026.

(3) CME Fed Funds traders are much more aggressive:

On Sept. 10th, 2024 CME traders organized around the following rate cut probabilities —

  •     A 23.6% chance of 2.5% (12 rate cuts)
  •     A 25% chance of 2.75% (11 rate cuts), and 
  •     A 17.6% chance of 3.0% (10 rate cuts)


The Sept 16th-17th FOMC meeting surely updates all of this.

Considerably.
 

Major Takeaways from the AUG CPI Report


The Core Services CPI was up +0.4% m/m, led by a +0.1% m/m tick up in the monthly Shelter Cost component to +0.5% m/m. This will be deemed unwelcome by the SEP FOMC, and lead the debate towards a 25 cut out of that meeting.

The Core Goods CPI was down -0.2% m/m. This was led by a -1.0% fall in Used Car prices. The Mainland China PPI deflation is not likely to be broad and apparent here. The import prices that do fall, however, will be a minor assist, in keeping the core CPI down.

+2.5% y/y in the broad CPI was the lowest annual headline CPI rate seen since Feb. 2021.

That moderate descent assures a path forward of FOMC rate cuts, folks.


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