Mullooly Asset Management
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Mullooly Asset Management
Dissecting the Fed's Strategy in May 2024
Discover the Federal Reserve's latest strategic moves as we unpack Chairman Powell's firm stance against interest rate hikes and how it directly impacts your wallet.
We cite financial commentator Callie Cox - her expertise helps to shed light on what steady rates mean for consumer loan rates, from mortgages to auto loans. Her sharp analysis on Twitter becomes the cornerstone of our discussion, providing valuable insights into the economic indicators that are shaping our financial landscape.
Gain clarity on the specter of stagflation, a term that's been looming over economic conversations for decades. We trace its origins back to British politician Ian McLeod and contrast it with today's economic climate, using Powell's own words to dissect why this phenomenon is not an immediate threat. As the presidential election approaches, we also explore the historical patterns of the Fed's actions around such political events, and forecast what to expect from upcoming meetings. Tune in for an essential briefing on how the Fed's decisions could influence the economy's trajectory and what that means for you.
Welcome back to the podcast. This is episode number 477. This episode is being recorded on Thursday May 2nd 2024, the year of our Lord Amen. I want to use this opportunity to recap the highlights from the Federal Reserve meeting that concluded 24 hours ago, on Wednesday May 1st. So for 24 hours now we've heard the news that the Fed is leaving interest rates right where they were from the previous meeting.
Speaker 1:There were a few key takeaways from this meeting that I think are worth talking about. There are six points that I want to focus on. The first is, and probably the most important is, that there are no rate hikes coming anytime in the near future and, amazingly, there had been plenty of rumors, gossip, speculation that the Fed's next move may be to raise rates to try and beat this persistent inflation. So during the press conference, which happens about 30 minutes after the announcement, each time Fed Chairman Powell was asked if rates might need to be hiked again and his answer was might need to be hiked again, and his answer was immediate and right on the spot he said it's unlikely. The next move would be a hike, and then he followed it up with this comment we would need to see persuasive evidence that the current policy that they have in place is not restrictive. A source that I use to put my notes together for this podcast is someone who I feel is an excellent follow on Twitter, or, if you prefer to call it X, is a woman named Callie Cox. You can find her on Twitter. She wrote hey, this implies that rates won't be moving up. This implies that rates won't be moving up and in her mind, that also implies that things like mortgage rates, auto loans and any other type of loans are probably peaking right at around these levels Important for the consumer to keep that in mind.
Speaker 1:The second point that I want to focus in on is a phrase that Powell said during the press conference yesterday. When asked about stagflation, he said well, I don't see any stag and I don't see inflation. His actual quote was no stag, no inflation. Stagflation a term we've had kicking around for about 50 years or so. That's a stagnant economy with persistent inflation. Interestingly, we've kind of Americanized that phrase.
Speaker 1:Stagflation was a phrase that was used back in the 1960s by a British politician, ian McLeod. He later became chancellor of the Exchequer in 1970. He was referring to the slow, stagnant economic growth that they had in the UK and consistent or persistent inflation. Powell talked about this yesterday and pointed out that, look, we've got an economy that's growing at about 3%. From the Bureau of Economic Analysis, we find that the fourth quarter 2023 gross domestic product how the economy grew came in at 3.2% for the fourth quarter of 23. The preliminary number for the first quarter of 2024 was 1.6, but Powell and many others feel that this number is going to be increased as they go through modifications in the coming weeks. So Powell pointed out that, look, we've got an economy that's growing at 3%. We've got inflation at 3%. When we were talking about stagflation 50 years ago, we were talking about economic growth of 0% or 1%, with inflation 7%, 8%, 9%, 10%. Very, very different set of circumstances now. So don't see stagflation hitting anytime soon. He was also asked moving on to the third point.
Speaker 1:Moving on to the third point, powell was asked whether they would, whether the Federal Reserve would, take the upcoming presidential election into consideration about the timing of rate cuts. Powell's response was look, we're apolitical, meaning if the economy needs a rate cut, they will cut, although history has shown they usually don't tend to act around the election time. We've got an upcoming election November 4th. We've got upcoming meetings. The next few meetings we've got June 11th and 12th. We've got July 30th and 31st. They meet in September, september 17th and 18th. And then they meet right after the election, november 6th and 7th, and then another one in December, right before Christmas, december 17th and 18th. Plenty of chances for them to take action if they decide that is the path they want to take.
Speaker 1:We've been saying for many months now we don't see a need for the Fed to cut rates. The economy is moving just fine. I think more people are starting to tune into the idea that rates are going to be higher for longer. The fourth point that I want to emphasize from the Federal Reserve's actions and the press conference from yesterday was that one set of data points isn't going to get the Fed to pivot, change directions or move quickly. Powell said policy is well positioned to address different paths the economy may take. They're ready to go at whatever pace or whatever is needed now in the economy.
Speaker 1:And something else that I'll just add on top of that is unlike situations in the last 10 years. If the economy was showing signs of faltering, the Fed didn't really have any room to cut rates. They've got plenty of room. The fifth point I want to highlight from the press conference with Chair Powell yesterday. He said something very interesting. There are two paths to rate cuts. The first is inflation finally reaches a sustained level at 2%. The second path to rate cuts would be an unexpected weakening in the labor market. People start losing jobs. The Fed's going to need to step in and take some action and we are starting to see some anecdotal evidence that things are starting to fray for the American consumer. We're going to touch on that in a moment. The sixth point that I wanted to highlight from the press conference yesterday Chair Powell briefly talked about rents and rent prices or rent increases. He noted how historically first-time renters, when you move into a new rental agreement, you usually have a pretty big increase in your rent Repeat tenants.
Speaker 1:On the other hand, renewals often see smaller increases, so at least historically, that's been the case. It's not so much happening right now. The amount of increases that we're seeing for first-time renters someone who's moving into a new location is dropping, and it's dropping drastically by comparison, and these were some data points posted by Bill McBride, who writes at calculatedriskcom, another excellent website you should check out. They posted information from Invitation Homes. If you are unfamiliar with the name Invitation Homes, they are the largest homeowner company in the United States. They own homes and they rent them.
Speaker 1:So if we go back two years ago to the second quarter of 2022, the increase in rent for new leases, the increase was over 16%.
Speaker 1:So basically, if there were an apartment that was renting for $1,000, the next tenant that came in would be signing a lease at $1,160, an increase of 16 plus percent $760, an increase of 16 plus percent. By the third quarter, just three months later, the increase was 15%. But by the end of 2022, the increase less than 1%. However, something interesting is happening on the renewal side. So in 2022, when a new lease was begun, they saw a typical increase of about 16%. Renewals were renewing at about 10 percent and that number stayed pretty consistent all through 2022. Now that we're seeing new leases being signed with virtually no rental increase, we are seeing renewals that are still seeing increases of 5, 6%, 7%, and so new tenants have seen a pretty sharp deceleration in the increases when they're signing a new lease, but we're still seeing renewals rising at a pace that's higher than inflation overall. Remember, we've got inflation at 3%, but when your lease gets renewed and you're paying 5%, 6%, 7% higher than you did before, that really matters.
Speaker 1:Why does it matter, however, to Jay Powell and the Federal Reserve? You need to know that rent and the owner equivalent rent, basically what it would cost if you were to rent out your home. This rent component is one of the largest pieces when they're calculating the consumer price index, when they're calculating inflation, rent is a sizable chunk of that number, and so this is one of the things that a lot of economists, including economists at the Federal Reserve, have been saying. We're going to see a drop in rental increases quarter to quarter and year over year, but some of this is becoming really sticky and we're not seeing the drop, or the amount of the drop, that some were expecting. I'll repeat what we've said in many of our weekly emails of late and on a couple of different podcasts and videos. Remember, the Fed historically cuts rates when the economy needs to be stimulated, and and at the present time, this economy doesn't need any stimulation. Unfortunately, the areas of growth that we're seeing continue to be the source, continues to stem from massive government spending, and deficit spending at that. We're seeing less and less contribution from the consumer. This week alone, we saw evidence of that from McDonald's and Starbucks. These are two good examples where a company can raise their price and raise their price, and raise their price consistently until they finally reach a level where the consumer turns away and starts looking for alternative places to buy a similar product cup of coffee, hamburger, you get the idea.
Speaker 1:When the consumer gets fully tapped out and or when we see an increase in unemployment looks to me like the Fed's going to be ready to act. I don't really see the need and we have said this before we don't really see the need for multiple rate cuts this year. But there's plenty of people in the market that use this as a sugar high or crack in the sense that, hey, if we get the Fed to begin lowering rates, that will free up capital, it will encourage more risk taking. Lots of other things get triggered when the Fed is easing. I think we're getting really close, but we're not quite there yet and so we've gone through the May Federal Reserve meeting this year. Next one, as we said, comes up middle of June, june 11th and 12th. We'll see what the Fed's ready to do. We're going to stay with one or no rate cuts this year. This has been episode 477. We appreciate you tuning in, as always, and we will catch up with you on the next episode.
Speaker 2:Tom Malooly is an investment advisor representative with Malooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Malooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Maluli Asset Management may maintain positions and securities discussed in this podcast.