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| | Hi Friend, The Federal Open Market Committee (FOMC) decided to maintain the
federal funds rate at its current level of 5.25%-5.5% at the June
2024 meeting. The decision reflects the Federal Reserve's cautious
approach as it continues to monitor inflation and economic activity.
Despite some signs of easing inflation, the Fed remains vigilant,
emphasizing the need for "modest further progress" toward the 2%
inflation target before considering significant rate cuts.
Inflation has shown signs of cooling, with the
Consumer Price Index (CPI) for May at 3.3% down
from 3.4% in April.
However, core inflation at 3.4% remains a concern. Producer prices index eased to 2.2% last month, from 2.3% in April. Core produceer prices, excluding food an energy held at 3.2%. The Fed is looking for
more evidence of consistent data moving to target, before making any substantial policy changes.
The Fed's decision to hold rates steady comes amid a robust economic backdrop, with strong job gains and low unemployment rates. Growth in the first quarter was up 2.9% year on year. Jobs growth in May was "very strong" with an increase of 272,000 jobs.
In contrast, the unemployment rate increased to 4.0% in May from 3.9% prior month. Then, new weekly filings for jobless claims, unexpectedly spiked to 242,000 this week, a ten-month high, raising concerns about growth in the rest of the year.
No wonder, the central bank remains wary of prematurely easing policy, which could risk reigniting inflation. Fed
Chair Jerome Powell and other officials have indicated a preference for
a "go-slow" approach to rate cuts, emphasizing the need for more data
to ensure inflation is on a sustained downward path.
The
FOMC's latest 'Blue dot" projections suggest only one rate cut is
likely before the end of the year, a reduction from earlier expectations
of two to three cuts.
While the FOMC has left the door open for potential rate cuts later in the year, the likelihood of significant easing remains low unless there is clear and sustained progress in reducing inflation. The Fed's cautious stance underscores its commitment to achieving long-term price stability before making any substantial policy shifts. Markets now expect just one cut this year, it could be as late as December. We would still consider two cuts a possibility, those blue dots do bounce about ...
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| | | | MPC Rates Decision ...
Next week, it will be the turn of the MPC to make the big rates decision. The Bank of England's Monetary Policy Committee (MPC) is expected to hold interest rates at 5.25% at the upcoming meeting on June 20, 2024.
Will the MPC cut rates? Market expectations, based on overnight index swaps, suggest that August 3 is the more likely date for the first rate cut since 2020, with at least one more cut anticipated by the end of the year.
While UK inflation has been falling, it remains a concern. As with the Fed, the Bank is cautious about easing monetary policy too soon, which could lead to a resurgence in inflation. The latest data indicates that inflation CPI basis is expected to fall towards the 2% target but will rise again later in the year.
The latest U.K. economic data suggests the economy expanded by 0.6% in April, year on year compared to growth of 0.2% in the first quarter. News headlines report growth was flat but that is month on month. We always use the year on year comparison.
The unemployment rate increased to 4.4% from 4.3% in April. The number unemployed increased to 1.51 million, up 24,000. The number in work fell by 30,000. Vacancies fell by just 4,000 to 904,000. Earnings three month basis were steady at 5.9%. The single month data suggest earnings slowed to 5.5%. The housing market is slowing as fixed rate mortgages unwind but real earnings CPI basis increased to 3.6%, easing the mortgage squeeze.
It's a mixed picture, which could suggest an economy at a turning point. Perhaps too soon yet to move ahead of the curve.
The Bank of England will also consider the broader international economic environment. Recent growth has been stronger in the United States than in the euro area. Inflationary pressures have moderated somewhat but remain a concern. The divergence in monetary policy expectations between the US and Europe, adds complexity to the decision-making process.
The upcoming general election on July 4, 2024, is a further factor. The Bank may prefer to wait until after the election to make significant policy changes. A new [Labour] government will change the economic landscape with new tax and spending plans and a few surprises.
In summary, while there is some speculation about a potential rate cut in June, the consensus among market participants and analysts is the Bank of England will hold rates at 5.25% next week, with a more probable rate cut occurring in August and one further rate cut possible this year. As always we recommend a model scenario of base rates at 4.5% in the years ahead, no return to Planet ZIRP ... soon to be the Red Planet ...
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| | That's all for now. Have a great weekend break ...
John
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| To understand the markets, you have to understand the economics ...
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References This week's posts relies on extracts from our daily "What the Papers Say Review." Certain research content has also been generated using Perplexity AI. This is our favorite AI research tool. Photos are from Adobe Stock.
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| | © 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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