Mullooly Asset Management
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Rate Cuts in 2024?
What if the Federal Reserve isn't planning to cut interest rates as soon as the market anticipates? Join me, Tom Malooly from Malooly Asset Management, on our latest episode recorded on June 13th, 2024, where we unpack the latest Consumer Price Index (CPI) and Producer Price Index (PPI) reports that indicate a slowing pace of inflation. We dive into the outcomes of the Federal Reserve's recent meeting, exploring Chairman Jerome Powell's emphasis on the necessity of sustained lower inflation and a weaker job market before any rate cuts are considered. With jobless claims experiencing a slight uptick, we delve into the potential repercussions on the broader economy and why a single rate cut in 2024 is gaining consensus.
Expect a critical examination of the Federal Reserve's strategy to achieve its 2% inflation target, including the likely market responses if rate cuts don't materialize immediately. We discuss why the Fed might choose to wait for consistent inflation data over several months before making any moves, despite market pressures. This episode offers insights into why the current economic landscape doesn't justify immediate rate cuts and why sticking to your investment strategy is crucial for economic stability. As we look ahead to a promising latter half of 2024 and into 2025, we provide a balanced perspective on maintaining optimism and steady investment strategies amidst these economic developments.
Welcome back to the podcast. This is episode number 478. I am Tom Malooly from Malooly Asset Management in Wall Township, new Jersey, and let's get started. We're recording this on Thursday, june 13th 2024. Yesterday, june 12th, we had two large data points in terms of economic information. The first was the CPI, the Consumer Price Index, which was reported at 8.30 in the morning. The number's starting to show that the increase in inflation is really starting to slow down to the point where we are now starting to see drops in month-over-month and year-over-year numbers. We're getting to that point where we can speak openly about not only will the Fed cut rates, but when the Fed will cut rates.
Speaker 1:We've been in print and on audio here for the last several months indicating that we believe the Federal Reserve will be cutting interest rates, possibly once and possibly not at all in calendar year 2024. That seems to now be becoming the consensus that there may be just one interest rate cut for the entire calendar year. But there's still plenty of people out there who are hopeful that the Fed will start cutting rates in September and through the end of the year. We don't know. One of the things that we continue to rely on is that the Federal Reserve usually cuts rates. Usually cuts rates to stimulate the economy, and this economy right now does not need stimulating. It seems to be growing okay. The growth seems to be financed primarily by government spending that's out of control and pretty much reckless. We still see the economy growing.
Speaker 1:The second point that we received, the second bit of information that we received yesterday, was the end of the two-day Federal Reserve meeting, where they announced that they're going to keep rates for now as they are. Federal Reserve Chairman Jerome Powell spent most of his time during the press conference talking about when interest rates may be happening. He made a couple of points and I do want to talk about this. Someone asked him why is there only one cut now in the projections for 2024? So when they talk about these projections, they talk about something called the dot plot and this is pretty much a graph where all of the participants in the meeting there's 19 of them they put a dot on how many rate cuts they see. Two years ago it was how many rate increases they see. How many rate increases they see Right now. The majority of the dots on the dot plot came down to basically one that there's going to be one rate cut. He was asked why is there only one rate cut being projected for this calendar year?
Speaker 1:Powell's response was look, one interest rate cut is not going to make a big difference in economic data. However, it's usually that first rate cut that tends to get people's expectations ramped up for future rate additional rate cuts in the future, and that really gets some people excited. So don't go too crazy over the idea that there may be just one rate cut, because once they begin they tend to go in that direction. It works in the opposite too. When the Federal Reserve is raising interest rates, they usually don't raise them once and let it go. They tend to raise rates sequentially for a long period of time. Likewise, they tend to cut rates sequentially for a long period of time.
Speaker 1:Another point that came up in the press conference yesterday. Powell explicitly said that the Federal Reserve started to get concerned after getting a couple of these reports over the last few months showing that inflation was not going down, that inflation was leveling off. Quotes was three straight. Good reports doesn't necessarily mean that a rate cut is coming. The Federal Reserve isn't just looking at inflation. They're looking at a lot of different data points that are out there. Remember the Fed has a dual mandate they need to control inflation and they also need to keep an eye on employment and try and steer the economy towards full employment.
Speaker 1:Now, one of the things that's been happening so far, the last three months, is that we are starting to see some jobless claims numbers increase. So these are first-time filers who are losing their jobs. They are now, for the first time, filing for unemployment benefits. We're starting to see some slowdown, or at least indications of possible slowdowns, in the economy. It doesn't mean that the economy is going down the tubes overnight or even tonight, this week, this month, maybe not even this quarter, but it does show that there is some strains in the economy. So we're seeing overall inflation leveling off, possibly even going down, and we're starting to see unemployment tick up just a little bit.
Speaker 1:One of the things that Jerome Powell said repeatedly during the press conference yesterday, june 12th, was that the test for the first interest rate cut would be having greater confidence that we're seeing lower inflation or an unexpectedly weaker job market, and so we're starting to see both of these happening right now. This morning we've got the producer price index report which came out that also showed inflation is starting to ease. That's very good. We're also starting to see Thursday morning. So we had jobless numbers again. They came in about 20,000 higher than what the street was expecting. He also wanted to emphasize that he doesn't expect the job market you know, the unemployment scene to completely fall apart. He thinks that there could be some further weakness parts of the recipe that are going into the first interest rate cut. So he also wanted to emphasize during his press conference. So he also wanted to emphasize during his press conference it won't take some sort of financial crisis for the Fed to act. They have their script. They know when they want to start pulling the trigger, when, and right now, inflation. For the last few months at least, the data has been a little sticky, showing that inflation is still here in the system.
Speaker 1:One of the things that the Federal Reserve and Powell in particular want to avoid is what happened in 1979 and 1980. At that point, we saw interest rates going up to the high teens. When we finally started to see a break in the increase in inflation, the Fed was quick to lower interest rates. Unfortunately, by lowering interest rates, you're stimulating the economy. While the economy started to get some more stimulation by seeing lower interest rates, it started to pick up again and inflation came right back, and that's why we had these back-to-back recessions in the late 70s, early 80s. Powell really wants to avoid that. He's avoided a recession now over the last two years, while interest rates have gone up, which is truly a work of art, in my opinion. He wants to avoid us slipping into a recession or, likewise, facing additional inflation just because they started raising interest rates. Other thing that goes with that is that the neutral long run rate, the long term rate, is higher. So Powell said that interest rates are less likely to go to pre-pandemic levels, and that question of how restrictive rates are now has become more pressing in the last few meetings.
Speaker 1:The point that we want to underscore with just trying to translate what he's saying is interest rates are not going back to zero. That was a fluky period of time from 2008 through the pandemic through 2021, where we saw short-term interest rates near zero. We are not going back to that, and so now people are starting. Economists and market strategists are now trying to pick a number somewhere between zero and 5%, where we're at now on short-term rates, to say where the Fed really ought to be. If you get three interest rate cuts, that's 75 basis points. That takes us down to 4.5. Short-term rates right now are between 5.25, 5.5. And so if we have three interest rate cuts, that takes us down to about a 4.5% short-term rates. There are some economists that are today now saying, oh, we could get to 3.5%. Remember, they're all predictions but the idea of short-term interest rates going back to zero probably not going to happen. I think they're done. So I think that there will still be.
Speaker 1:You will earn something for short-term money at the bank, but let's talk about the historic real rate of return for short-term cash money in the bank. Historically, you earn somewhere between 1% and 1.5% above the rate of inflation. So this is why economists and market strategists are now talking about a 3.5% rate on money markets and short-term things like treasuries. That's because if the Fed reaches its target of 2% and then you add on 1% or 1.5% in terms of a real rate of return, you are now looking at earning 3% to 3.5% on your short-term investments. It seems like a likely scenario. I don't think it's going to be happening overnight, because I don't see any impetus for the Federal Reserve to cut rates aggressively.
Speaker 1:Having said that, we still have great faith that the Fed will be cutting interest rates. The next move for interest rates will be lower, not higher. At the previous Fed meeting in May, powell said the next move on rates will be lower, not higher. He said that yesterday at the press conference we will see lower rates and that the next move is going to be down, not up. I honestly could not believe back in May that people were interpreting his message that there may possibly be a rate hike in the future. I mean, he never said that and never even intimated that that was going to be happening.
Speaker 1:So when they polled the 19 members of the Fed yesterday, here's how the numbers broke out Four people at the meeting projected no rate cuts, zero. Seven members of the Fed were looking for one rate cut. So 11 of the 19 were looking for no or one rate cut through the end of this year. Eight the remaining eight were looking for two rate cuts this year. What got the market's attention yesterday was that in March this number where they're projecting one rate cut, this number back in March was three and the consensus, if you could call it that of the Federal Reserve members back in March was that there would be three interest rate cuts this year and you've got some of these yahoos on Bloomberg in the morning saying that forget about three. They need to do five, six and sometimes even seven interest rate cuts in 2024. Just no chance. But the big change between March and June is that the Federal Reserve in general, as a consensus, was looking for three rate cuts in March. Now, a few months later, in June, it seems to be they're projecting the average of maybe one rate cut this year. Again, of the 19 members, four of them are projecting no rate cuts this year. Seven of them are projecting one rate cut this year. The remaining eight see two rate cuts this year.
Speaker 1:There is something else that I wanted to mention from yesterday's Consumer Price Index report. This is the June report, so it's for the month of May. So the story of May's CPI report really came down to what's going on with core services. Down to what's going on with core services and what more specifically, without shelter prices included. So core services saw its largest month over month decline in almost two years, going back to the third quarter of 2022. And this was also its first negative print in that same time period. While Shelter remains very stubborn, those rent prices and owner equivalent rent have not been coming down as much as everyone expected.
Speaker 1:The overall inflation picture looks to be easing, and primarily for things like this, where we've seen core services now starting to show negative prints. When you're comparing month-over-month numbers from one to the other, this is a very big indicator that what the Fed has been saying they're looking for. They want to see inflation trending to 2%, and I think the next thing that we have to caution everybody to is we're not at 2% yet. In fact, the consensus among the Fed is that we're going to see 2.8% in core inflation between now and the end of the year. So we're not at 2% yet.
Speaker 1:When we do get, when the economy does reach, 2% inflation 2.0% inflation there's going to be a lot of people out there who expect the Fed to cut rates that day. I don't believe that's going to happen. I think the next shoe to drop is going to be where the Fed says okay, we've gotten one month of our target 2%, let's get three months of this before we go to cut rates, and that will just upset everybody in the market. But right now everything is moving, albeit slowly. Everything is moving exactly as the Fed has mapped out. So continue to stay the course, I think we're going to be just fine in terms of the economic story as we move into the second half of 2024 and into 2025. I can't stress enough that the Fed cuts rates primarily as a tool to stimulate the economy, and right now this economy does not need stimulation whatsoever. So this has been the message for episode number 478. Thank you again for your time and we'll talk to you again soon.
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 Malooly Asset Management may maintain positions and securities discussed in this podcast.