For the first quarter of 2024, interest rates have broadly reflected a divergent view on where the FOMC stands on its open market agenda.
With employment currently surging – February saw 275,000 added to payrolls – and inflation being axed down to around 3.2%, the conversation about cutting rates seems counter to a traditional perspective of how the Fed utilizes interest rate policy to fulfill its dual mandate. So, what’s the basis for the market expecting cuts for the remainder of the year?
According to a Reuters poll from early March, 70% of economists of 108 surveyed expected the first cut to begin in June. This was an increase from about half of those who believed it to be the case in February. So, momentum is building that the market sees a dovish Fed as the year progresses. Considering that expectations of a 2.1% growth in GDP, adjusted for inflation, is higher than the Fed’s official estimate of 1.8%, it appears that stimulating growth isn’t the focus of the market for a rate cut. So, what is the motivation?
I’d argue that it’s a kind of surgical application of lowering specific rates.
The effects so far of the fastest increase in the fed funds rate ever has disproportionately affected the bottom half of savers. Costs of borrowing have driven up payments for mortgage holders and consumers with the highest marginal-propensity-to-consume, represented by households earning $100,000 and less, per year. While private investment holdings have also gotten the brunt of the higher cost of capital – most notably the commercial real estate sector – the US stock market has gone relatively unscathed.
So, while inflation has drastically come down, it’s primarily at the expense of consumers’ ability to buy goods and services being materially diminished. That directly affects economic growth and exacerbates a growing discrepancy between capital holders’ (ie “investors”) prosperity and real economic output. It’s estimated that about 70% of the US economy is driven by domestic consumption.
The Personal Consumption Expenditures index, the Fed’s preferred inflation metric, is set to be released on Friday, March 29. Expectations are that it will remain at 2.8%. Any deviation will likely cause movements in the spot curve and compel a comment from Powell.
Whatever is the case, the US remains on strong footing compared to the other major world markets and what happens here will likely cause a rebound effect in credit markets worldwide. Here at Risemint, we don’t adjust our credit or equity positions on any singular event but as these months pass, we gain a bit more clarity on the strength of the markets in the near and medium terms to position our clients to benefit in the medium and long terms.