Just when the Federal Reserve has gotten just about everyone convinced that it will do a 25bps rate cut at its final meeting of 2024 a series of remarks by everyone from Chair Jay Powell to several Fed bank presidents has suggested that a December rate may not be a done deal after all. Powell notably said on Thursday that the Fed does not have be in a hurry to cut rates” in the current strong economy. On Friday Boston Fed president Susan Collins added her voice to the mix a December rate increase is “certainly on the table, but it’s not a done deal.”
What do the latest economic data say?
Enter Michael Pearce, the chief deputy U.S. chief economist at Oxford Economics. When I ask him the about the October retail sales report, he says, “I think really the headline message here is that the US consumer continues increase spending at a very healthy pace.
”We saw that consumption number last quarter, above 3%. I think the…estimate of Q4, it's early days, but we would have spending in real terms rising at close to 3%. So very clearly, the real economy, is still in pretty good shape. And I think the US consumer is the most important part of that.”
As for the employment side of the Fed’s dual mandate the current level of weekly jobless claims “is consistent labor market that is still performing relatively well.”, Michael says. “ However he notes that the over the past year job markets “have become a lot less tight…so even though we don’t have a big increase in firings across the economy we do see other signs of deterioration,” including a slower pace of hiring and payroll growth trending lower.
On inflation Michael acknowledges that recent monthly and year-over-year numbers have been a bit on the high side. However he says a major driver of this has been sticky shelter costs, which should continue to moderate as rents on new leases come down. He predicts this will help bring inflation numbers down over the next six to 12 months.
So where does this leave the Fed and the odds of a December rate cut?
”I certainly think it's a closer call than maybe people were factoring in just a week or two ago. I think what the Fed is clearly signaling is the pace of rate cuts going forward is going to be more moderate than what we've seen. We're getting closer to neutral and there's a big question over what exactly neutral is. So that would argue for a slower pace of rate cuts.”
So dive in and hear, see why even as Michael is sees dynamics that could cause the Fed to skip doing a rate hike next month, he is still putting his money on the 25bps move. And why he thinks coming Dot Plots may show fewer rate cuts next year than previously expected as fiscal forces come into play.
Michaeal Pearce C.V.
Deputy Chief US Economist
Oxford Economics Jan 2023 - Present
Senior US Economist
Capital Economics 2012 - 2022
Economist
HM Treasury Jun 2010 - Jun 2011
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