Monthly Economic Insights
Rate cut in clear view as inflation recedes and Fed looks to boost outlook and investments
The U.S. economy continues to show resilience, with key economic indicators painting an optimistic picture. The latest good news: Inflation fell to 2.9% over the last 12 months, its first dip below 3.0 percent since March 2021.
This decline is mainly due to falling energy prices and easing supply chain pressures. However, core inflation, which strips out the more volatile food and energy sectors, remains slightly elevated at 3.2%. This indicates that while headline inflation is slowing, underlying price pressures, particularly in housing and services, may still keep economists guessing about sustainable CPI trends.
On the labor front, the national unemployment rate rose 0.2% over the month to 4.3% and is 0.8% higher than in July 2023. Even with this slight uptick, it remains well below historical averages and has provided welcome relief to employers looking to stabilize labor costs and reduce wage increases.
These favorable-to-neutral data points already have the Fed assuring markets that an interest rate cut in September should be expected.
Since July of last year, borrowing costs have remained at their highest levels in 23 years, with the Federal Open Market Committee (FOMC) raising the federal funds rate to a range of 5.25% to 5.5%. The spring uptick in inflation dashed hopes of a much-anticipated rate adjustment, as the committee opted to maintain its current stance until more evident signs of sustained stability presented themselves.
Due to new inflation and employment numbers (the Bureau of Labor Statistics (BLS) recently revised down jobs created in the past 12 months – from 2.9MM to now 2.1MM – now this is still on pace with jobs creation prior to the pandemic), market expectations have shifted dramatically. According to the CME FedWatch Tool, most traders now anticipate not just one but two rate cuts at the FOMC's September meeting. This anticipated move would represent a significant pivot from the Fed's current tightening policy and reflects growing concerns over the possibility of an economic slowdown.
The latest GDP report, however, showed that the U.S. economy grew at an annualized rate of 2.4% in the second quarter of 2024, exceeding expectations and reflecting robust spending and investment. This solid GDP performance suggests that the economy remains stable despite ongoing challenges.
Bottom Line: While inflation remains a moderate concern, the rising unemployment rate and downward revisions in job growth are pushing the Fed towards an almost certain .25% rate cut – and possible .50% cut – when the FOMC convenes again September 17-18. This could provide some relief to businesses and consumers facing higher borrowing costs. However, the broader economic variables of spending and new investments could suffer from cautionary consumer and business sentiment. As we approach the fall, all eyes will be on the Fed as it adjusts monetary policy to cool the economy while maintaining healthy labor and GDP levels.
— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company
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