Will the Fed's first interest rate cut be brought forward to September? It's not as simple as we think.
The Fed cuts interest rates in September? It's not that simple
On the 28th, the U.S. Department of Commerce released the latest PCE inflation data, which showed that the month-on-month growth rate of the U.S. price index fell to 0% from 0.3% in April, the lowest in seven months.
Not only that, but if the volatile food and energy prices are excluded, the year-on-year growth rate of the core PCE price index in May hit the lowest level in three years.
The decline in core inflation also means that US inflation will fall more rapidly in the future, which can also be seen as a milestone in the Fed's successful fight against inflation.
In May, the PCE index Huangbi growth rate was 0.1%
Therefore, a group of market participants and economists in the United States predict that the Fed will cut interest rates earlier to September this year, that is, more than two months later, the United States will start a cycle of interest rate cuts.
The Fed is hawkish and wants to cut interest rates, which is not so simple
However, things are not so simple, because the Fed's statement is actually very hawkish.
Fed Governor Bowman said this week: "U.S. inflation faces multiple upside risks, and no interest rate cuts are expected to be taken this year, and we are willing to support interest rate hikes if inflation comes down to a halt."
This means that the Fed itself is very pessimistic about the solution of the inflation problem, and does not rule out continuing to raise interest rates to deal with the inflation problem.
Fed Governor Bowman: Inflation risks remain
In addition to Bowman, other Fed Governor Tim Cook also spoke, and his statement was relatively cautious, saying that the Fed will cut interest rates at some point in the future, but the timing is uncertain.
The chairman of Atlanta also said that he expects to cut interest rates once in the fourth quarter of this year and about four times next year.
If we combine the last Fed interest rate meeting and the interest rate dot plot given at the meeting, then we can see that the multiple interest rate cuts in 2024 that the dot plot directly vetoed, it is basically impossible to cut interest rates in September, and one interest rate cut in December is the biggest possibility.
Fed rate cut dot plot
Therefore, although the decline in the PCE price index indicates that the US inflation data has slowed down, the Fed is still very hawkish. It is very difficult to cut interest rates three times this year.
In addition, if we carefully analyze the price data this time, we will also find that there are some problems.
For example, the supercore PCE data, which excludes housing data, is still stagnant at a high level, rising 0.1% month-on-month, marking the 49th consecutive month of growth.
The reason why prices continue to rise is that the United States' criticized health care costs and increasing medical insurance expenditures have led to an overall upward trend in American prices and an increase in spending.
A recession in the United States? Economic data is worrying
Economists who support a rate cut have a different view, arguing that now the Fed needs to cut interest rates, not only to consider inflation, but also to look at the US economy.
Recently, the Conference Board released a report: the US consumer confidence index fell from 101.3 in May to 100.4 in June this year. The data is as expected.
Although in line with expectations, it also shows that the Fed's continued maintenance of the federal funds rate of 5.33% has led to an increasing vulnerability to consumer confidence in the US economy.
The U.S. economy is in recession, and many people are looking for jobs
For example, a survey conducted by the Federal Reserve Bank of Philadelphia's Institute for Consumer Finance showed that one-third of the American population is worried about breaking even in the next seven to 12 months. This means that they start to worry about their employment and income, and are afraid that they won't be able to cover their bills.
In addition, 83.5% of respondents believe that the business environment for American companies will not improve in the next six months, so there will be employment problems for Americans.
Not only that, one of the biggest problems in the United States now is the real estate problem, but the sales of new commercial housing in the United States in May hit the lowest level since November last year, and the number of second-hand housing contracts fell to the freezing point, which shows that the United States now also has real estate problems.
U.S. second-hand housing contracts fell to freezing point
So back to that question, the Fed decides whether to cut interest rates, not only to see whether inflation in the United States is under control, if there is a recession in the United States, then the Fed has the obligation to stimulate the economy by cutting interest rates, so as to deal with the recession and economic crisis, which is also an important responsibility of the Federal Reserve.
The war on inflation in the United States continues
With inflation declining on the one hand, and obvious signs of recession in the U.S. economy on the other, it stands to reason that the Fed's expectations for interest rate cuts should increase, so why doesn't the Fed cut interest rates?
The answer lies in the persistence of inflation.
In the view of US economists and some Fed officials, the intrinsic nature of inflation determines that it is difficult for US inflation to be reduced to 2% in the short term.
The current U.S. price index is actually composed of three parts, that is, economic overheating, recession, and supply chain pressure.
The overheating of the economy actually comes from the $4 trillion economic stimulus plan approved during the Trump era, and the subsequent Biden still printed a large amount of money to stimulate the economy after taking office, which led to the overheating of the U.S. economy and the intensification of the inflation crisis.
During Trump's presidency, he printed large amounts of money to stimulate the economy.
It stands to reason that when the Fed raises interest rates dramatically, the US economy should soon be in recession. However, the U.S. Treasury Department has directly supported the U.S. economy with debt of $1 trillion in three months, although the U.S. economy has not had a hard landing. But it has also exacerbated the inflation problem in the United States.
Then there is the pressure on the supply chain, and we know that because Chinese goods are relatively cheap, the previous Sino-US trade allowed Americans to easily buy high-quality and low-cost Chinese goods, which significantly reduced American inflation.
But now, with the outbreak of the Sino-US trade war and the intensification of Sino-US trade frictions, the United States has raised tariffs on Chinese goods to about 20%, so Americans need to pay an average tariff of more than 20% if they want to buy Chinese goods.
After the US-China trade war, tariff rates rose from 3% to more than 20%.
This has also directly led to the rise in the price of goods in the United States, the rise in the price index, and the increase in inflation. Judging from the current situation, it is actually quite difficult for the United States to stop the trade war with China.
Therefore, based on the above three points, inflation in the United States is relatively sustainable, and according to the forecast model of American economists, the inflation rate in the United States will be close to 2% by the middle of 2027.
summary
If we only look at the data, the reduction of the PCE price index will inevitably lead to an increase in the expectation of interest rate cuts in the United States, and the rate cut time will be advanced to September this year.
However, if we take into account the persistence of inflation in the United States, the dot plot of the Fed meeting, and the concerns in the PCE data, it becomes clear that it is not so simple to cut interest rates early.
The battle against inflation continues, and it is not so simple for the United States to win.
Therefore, it may be a better choice for the Fed to decide whether to cut interest rates early in the short term, and to wait for more economic data to come out before making a decision.
Therefore, the inflation war in the United States has been fought for 2 years, and it is still not over, and it may take longer for the Fed to win and cut interest rates.
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