Economic Market Update: June 2024

Mixed Signals
Traditions Wealth Advisors
Greysen Golgert/Brien L. Smith CFP®
Economic Analyst Intern/Chief Investment Officer
June 25, 2024

Monetary policy among the major central banks officially diverged this month as the European Central Bank (ECB) and the Bank of Canada (BoC) pulled the trigger on a 25 basis point rate cut, with more cuts expected by the end of the year. Meanwhile, the US Federal Reserve System (Fed) and the Bank of England (BoE) remain committed to their current interest rate levels of ~5.25%. This divergence began because the BoC and ECB have seen enough progress on inflation to warrant a gradual easing of their monetary policy. Critics of the cut, especially in the European Union, see the move as premature. For an economy already seeing a resurgence this year, the fear is that cutting rates will bring inflation higher than its current level. While rate cuts are expected later this year in the US and UK, the Fed and Bank of England remain hawkish for now. Each has indicated that they need to see further evidence of cooling inflation and a corresponding decline in economic growth before they can begin easing monetary policy.

In his opening remarks at a press conference following the FOMC meeting this month, Jerome Powell emphasized the Fed’s commitment to keeping the Federal Funds Rate high for as long as the FOMC deems necessary. Pressed on all fronts by reporters, he answered again and again that the Fed would continue to pursue its dual mandate objectives of stable prices and maximum sustainable employment. Notably, fifteen members of the nineteen-member FOMC penciled in projections for at least one rate cut before the end of 2024. Despite stubborn inflation from Q1, the CPI(Consumer Price Index) and PCE(Personal Consumption Expenditures) numbers have been positive recently, and it is encouraging to see most of the committee project a slight loosening of monetary policy before the end of the year. However, it should be acknowledged that the Fed is content to let this current rate environment ride until its hand is forced. As Chair Powell indicated in his speech, they will decide based on what the data tells them, and right now that data is telling them to remain firm.

That said, the US economy has been hit with mixed signals recently. It’s too early to say whether these developments are positive or negative, but at the very least important indicators are not in line with typical expectations. To clarify, the current rate environment should theoretically cause inflation to cool, economic growth to slow down, and unemployment to rise. One figure that finally moved the way it should according to conditions was inflation. The one-month change in CPI inflation for the month from April to May clocked in below expectations at ~0%, bringing the year-over-year rate down to 3.3%. This is still well above the Fed’s stated goal of 2% year-over-year inflation, but it should be viewed as a positive. After all, lower inflation is lower inflation. However, the major expectation for this quarter is that economic growth will decelerate as it did in Q1. Recent developments indicate that this may not be the case after all. Nonfarm payroll employment (up 165,000 in April) was expected to increase by 190,000 in May but instead shot up to 272,000. In conjunction with that surprise reading, the Atlanta Fed’s GDPNow estimate for Real GDP growth in Q2 is hovering around 3% as of June 20th. The official figure for Real GDP growth in Q2 won’t be out until late July, and the adjusted figure won’t be released until August, but a robust US economy will likely defy expectations once more. The next time FOMC meeting will be July 30-31, right after the release of that advance estimate. By the time they meet, maybe these murky waters will clear and make the path forward obvious. As we saw in Q1, sometimes the data has other plans.

Sources:
https://perc.tamu.edu/blog/2024/06/inflation-wages-june-2024.html
https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20240612.pdf
https://www.atlantafed.org/cqer/research/gdpnow