RSVP to the Fed's pool party on July 31
The timing of the Fed's first cut is the question in markets. Chill. Fed officials are all over the map on willingness to cut and demand more data. July 31 is the earliest cut.
Get your pool floaties ready. Summertime.
It’s hard to escape the Fed now. Every scrap of data on inflation causes an outsized market reaction. Blame the hyper-focus on the Fed’s first cut and the Fed’s hyper-focus on data. In today’s post, I argue that the Fed will likely wait until July 31 to cut.
Three main supporting arguments:
By July 31, the Fed will have six months of core PCE for 2024.
No dissents on the first cut, and July is enough time to reach consensus.
The political calendar is irrelevant for the Fed.
I cover the second two below the paywall and the first one here.
It’s the inflation data, stupid.
Every time Fed officials speak, two themes emerge: more data and no rush. Here’s Chair Powell on 60 Minutes in early February:
Basically, we want to see more good data. It's not that the data aren't good enough. It's that there's really six months of data. We just want to see more good data along those lines. It doesn't need to be better than what we've seen, or even as good. It just needs to be good. And so, we do expect to see that. And that's why almost every single person on the, on the Federal Open Market Committee believes that it will be appropriate for us to reduce interest rates this year.
That was about a week before we got the CPI for January. Given the oddities in the data — all of which seemed to go a bad way — the month might only scrape by as “doesn’t need to be … as good.” Powell had tried to tell markets not to freak out over a month, but what did markets do? Freak out. That week of CPI, retail sales, and PPI swung market bets on the first cut, now resting at June as most likely.
The exact month when the Fed cuts is likely not as consequential as the markets seem to think, but it’s more consequential than the Fed seems to think. The uncertainty around the cut is the problem. It’s causing market volatility, which is bad.
It would be un-Fed-like to tell us how many more months of good data it needs to be confident. But now is an excellent time to be un-Fed-like. Volcker didn’t break the back of inflation by sticking to the playbook of the prior decades. The inflation challenge facing the Powell Fed is nothing like the Volcker Fed faced, but the willingness—the confidence—to be bold would be welcome now. Give us a number; give us a date. More clear guidance, not more Fedspeak, would help a lot.
Don’t get your beach towels out yet. So, what are we left with? The data calendar. By the FOMC vote on July 31, they will have six months of CPI, core PCE, and employment for 2024. Six months is a nice, responsible-sounding number.
Currently, core PCE is 2.8% year-over-year—well below its high of 5.5% in 2022. By this summer, even with some bumps and a slow grind down of shelter inflation, core PCE should be undeniably close to 2%. Six months of good data on top of the six months in 2023 should give the Fed more than enough confidence to start cutting. And even the hawkish commentators should see it, too. Time to RSVP.
Buckle in. As I argued in my recent posts, there are risks with this approach.
My recent podcast with Bilal Hafeez at Macro Hive covers the Fed and more.