It doesn’t happen often. The last time that both the monthly CPI inflation report and an FOMC policy decision fell on the same day was back in 2020. Needless to say, the world was a much different place back then. But with the two most widely-watched market events arriving together yesterday, traders were braced for possible fireworks depending on how the day unfolded.
First up was the latest read on inflation, and for the second straight month there was good news that gave an immediate lift to markets. Both headline and core readings came in below expectations, with headline inflation flat for the month and ticking down to 3.3% on a year over year basis, while core (ex-food & energy) came in at 0.2% for the month and 3.4% year over year. Importantly, digging into the numbers showed that core services ex-housing, which has been the sticky problem area, actually fell during the month for the first time since Q3 2021. Overall, the numbers seem to suggest that the previous trend of disinflation is getting back on track. Meaning that the hotter readings that occurred back in the first quarter of this year were, dare we say, transitory?
Later in the day, Chair Powell took center stage to provide the latest decision from the FOMC. No policy change was expected, and they’ve now been on hold for seven straight meetings dating back to last July. The real news came in their latest economic projections which are updated on a quarterly basis. They showed that the Fed is anticipating a slightly stronger economy and inflation this year than previously thought. The even bigger development was the latest update to their “dot plot,” which reflects the individual forecasts of all 17 FOMC members for the expected path of the Fed Funds Rate over the next couple of years. The median of those forecasts is the true signal these days, and it shifted down from three rate cuts for this year to just one now. However, 2025 also shifted up from three rate cuts to four.
Putting it all together, the good news is that by the Fed’s own admission rate cuts are coming. It’s just a matter of when, with the debate starting to narrow to maybe Q3 if the data continues to cooperate but almost certainly by Q4, barring an unexpected hiccup. So far, the market isn’t fully taking the Fed at their word – current pricing shows that investors still believe in the possibility of two cuts this year, with hopes of further good news on inflation over the summer allowing the Fed to make their first cut by the fall.
Source: Yardeni Research, as of 6/13/24
Source: Bloomberg, as of 6/12/24
Carl Noble, CFA®
Senior Vice President of Investments
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