Recent economic data points to a growing likelihood that that Fed can start to raise rates without tanking the economy and pull off a “soft landing”.

Key Takeaways

• A stronger than expected 2Q24 GDP report has investors questioning the pace and number of Fed rate cuts in ’24 (again)
• A low CPI further validates the Fed’s mission of slowing inflation
• Historically the Fed has pre-emptively cut rates when markets were near all-time highs

Given the persistent strength of the US economy we do not believe the Fed will rush into rate cuts. While we continue to expect the Fed will cut rates one or two times before year-end, given the ongoing strength of the US economy the Fed can continue to wait until it sees confirmation that inflation is at (or near) it’s target. Furthermore, without any material decline in US economic activity we believe the upcoming rate cut cycle will be limited and that rates will be persistently “higher for longer”.

Let’s review two key pieces of economic data that were released last week.

2Q24 GDP increased 2.4% y/y, nearly 2x the pace from last quarter and well ahead of estimates.

The US economy continues to experience robust growth driven by consumer spending. Business and government spending are also contributing, but make no mistake the US economic resilience is consumer spending fueled. While consumer balance sheets are becoming extended (see our 2Q Wrap) we view the ongoing strength of the US economy as further support for the Fed to maintain higher rates for longer and slowing ease into rate cuts.

Inflation (measured by PCE) increased just 2.5% y/y in June, continuing its downward trend

We expect the persistence of cooling inflation to be the key catalyst for the Fed to initiate it’s first rate cut.

All of this then leads to the topic of if the economy is strong and inflation is cooling, will the Fed cut rates this year?

The Fed historically cuts rates when markets are at, or near, all-time highs

As I previously talked about the Fed has a tendency historically to start cutting rates when the S&P 500 is near an all-time high and economic growth is strong.

Historically Fed rate cuts occur before markets begin to anticipate weakness in the economy. In fact, since 1982 63% of all Fed rate cuts have occurred when then S&P 500 was within 3% of its all-time high.

Bottom line: We believe the Fed is likely to start lowering rates in September/October, with any moderation in economic activity an additional catalyst to cut. That said, we do not expect the upcoming rate cut cycle to be a full easing cycle and return rates back near zero.

ENDNOTES

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