DKI published a white paper in November of 2021 warning that inflation was a big and non-transitory problem. By May or June of 2022, most of the big macro strategists were already calling for Federal Reserve rate cuts despite continued high inflation. I’ve spent the past two plus years saying rate cuts would eventually come, but that for the foreseeable future, we should expect “higher for longer”.
In this week’s 5 Things video version, we noted that market expectations for a September rate cut were 100%. While I acknowledged that a rate cut was possible, I thought the probability of a Fed rate cut in September was well under 100%. Many market participants took comfort in the knowledge that they were in good company. They ignored the fact that the “pivot to lower rates” crowd has been wrong on exactly this point for years.
Today, we got a 2Q GDP print of 2.8%. That’s a healthy number and well above the expected 2.0% / 2.1% estimate. Along with that, the personal consumption expenditures price index (PCE) for the quarter was up 2.6% with the core PCE up 2.9%. Both of those figures were below last quarter, but still above the 2% target. Of additional significance, housing prices remain high with declining sales volume. (This is different from what DKI predicted a couple of years ago.) Also, initial jobless claims of 235k were down by 10k from last week. (We note the continuing unreliability of any employment-related “data”.)
While I acknowledge the Fed may choose to cut rates in September, I continue to believe the probability of a rate cut that soon remains well under 100%. Many smart people, including economist and DKI Board Member, Michael “Mish” Shedlock @MishGEA correctly point out that the private sector of the economy is indicating we’re already in a recession. I agree with Mish and have been saying for more than a year we have a bifurcated economy. Most Americans aren’t doing well financially. However, Congress is spraying trillions of dollars of inflation-causing stimulus spending into the economy which is leading to today’s high GDP number along with the still-too-high PCE figure.
While we still have a couple of months to go and more data to receive before Powell and the Fed have to make a decision on a September rate cut, I continue to believe there’s a high probability they look at the strong GDP print, continued inflation, and a still-encouraging employment situation and conclude they’re going to move slowly and cautiously regarding the decision to make that first rate cut. This potential action will cause many in Congress to complain, but Congress is not even considering cutting spending and have no one to blame but themselves. (I continue to note that overspending is a bipartisan problem.)
IR@DeepKnowledgeInvesting.com if you have any questions.
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