Jun 17, 2024

A Steady-as-She-Goes Fed and a Tame Inflation Report

Weekly Market Commentary

As expected, the Federal Reserve announced last Wednesday that it held its key rate, the fed funds rate, unchanged at 5.25 – 5.50%.

The Fed left the door open to a cut in rates later in the year if inflation makes meaningful progress toward its 2% annual goal or if there is an unexpected weakening in the labor market.

On the inflation front, the Consumer Price Index (CPI) finally delivered for investors. It’s only one month, but May’s CPI brought relief after unexpectedly high numbers earlier in the year.

Let’s briefly review. Aided by a drop in energy prices, the CPI was unchanged in May, according to the U.S. Bureau of Labor Statistics. The CPI is up 3.3% from a year ago.

The core CPI, which excludes food and energy, rose 0.16%, the lowest since August 2021. The core CPI is up 3.4% versus one year ago, the slowest pace since April 2021.

The overall narrative didn’t change much. Inflation for goods is low, and prices are actually declining for some consumer goods. Inflation in the service sector eased but remains a problem.

Notably, auto insurance, which is up 20% over the last year, fell 0.1% in May.


Economists and investors put much more emphasis on the rate of inflation versus the actual price level. The core CPI has significantly slowed, declining from a peak of 6.6% in late 2022 to 3.4% in May.

The general public, however, seems more focused on record prices. Last week, the Wall Street Journal summed it up with a story entitled, “Americans Really, Really Hate Inflation—and That’s a Big Problem for the Fed.”

It’s not simply about rising prices and the family’s budget; high prices are mentally taxing. Many can recite pre-pandemic prices. It’s unlikely we’ll see those prices again, and that adds to the angst.

A Patient Fed

The unexpected rise in inflation early in the year delayed rate cuts. Fed Chief Powell signaled that we may still see a reduction this year, but the Fed appears to be in no hurry to oblige. The prior forecast of three rate cuts is officially down to one this year. He called one or two “plausible.”

So, if rate cuts this year were to be the drivers of the major indexes, and rate cuts have yet to materialize, why have the S&P 500 Index and the Nasdaq marched higher? Why did these indexes notch new highs on Tuesday, Wednesday, and Thursday (MarketWatch)?

Four catalysts

  1. AI is driving tech – investors seem to view AI the way they viewed the internet in the mid-1990s.
  2. Earnings have topped expectations.
  3. Inflation disappointed early in the year but is no longer accelerating on a monthly basis. Year-over-year, the core CPI has trended lower—disinflation. It helps relieve pressure on the Fed.
  4. Job growth is solid, the economy is expanding, and the soft-economic landing scenario appears to still be in pace.

There are indications economic growth may be slowing, and the labor market may be showing some early signs of pressure. In the absence of big rate hikes, the economic fundamentals have done most of the heavy lifting.

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Another Soft Inflation Number Bolsters the Case for Lower Rates

In 2021 and 2022, soaring inflation sparked the most aggressive series of rate hikes in decades. While prices remain high, the rate of those price increases has slowed, and the Federal Reserve may finally be seriously considering a reduction in interest rates.

At First Glance, Another Solid Jobs Report

The U.S. Bureau of Labor Statistics (BLS) reported that nonfarm payrolls rose a solid 206,000 in June, topping the consensus forecast offered by Bloomberg News of 190,000. However, first glances may not always leave the correct impression. Private sector payrolls increased by a more modest 136,000, and nonfarm payrolls were revised downward by 111,000 in April and May.

A Dysfunctional Housing Market

What happens when mortgage rates tumble below 3% and then spike above 7%? Unintended consequences are bound to play out. In hindsight, they aren’t difficult to spot. You’re a winner if you have no intention of moving and were lucky enough to lock in ultra-cheap rates just a few years ago. Those who want to move or renters who want to buy are less fortunate.

Mixed Signals

Much has been made of the remarkable resilience of the American economy. Forecasters who confidently called for a recession in 2023 got it wrong. So far this year, the economy is generating new jobs, and the U.S. economy has yet to falter.

Strong Jobs Report, with a Caveat

The U.S. Bureau of Labor Statistics reported that nonfarm payrolls in May rose 272,000, easily beating expectations of 190,000 per the Wall Street Journal. Over the past three years, nonfarm payrolls have usually topped expectations. That narrative remains intact.