Economist: Fed's Rate Cuts Won't Come Until July

It’s easy to make the prediction that, undoubtedly, the Federal Reserve (FOMC) is leaning toward cutting rates this year at some point, says John Beuerlein, chief economist at the Pohlad Companies.

However, the stickiness of inflation in some categories, along with the strength of the labor market, is causing them to be patient, he notes in his April 2024 report, as the current and ongoing rebound in some economic metrics has reduced the urgency of a near-term interest rate cut.

The markets have moved expectations for the timing of the first interest rate cut to July, Beuerlein suggests.

FOMC members will have the confidence to make the initial cut in rates once they see further evidence that inflation is moving sustainably toward their target of 2%, along with the continued rebalancing of supply and demand in the labor market.

The median forecast of the 19 members at the FOMC’s March meeting was for three interest rate cuts this year. They said so by the slimmest of margins.

“Interestingly, 10 members forecast three or more cuts, while nine members forecast two or fewer cuts,” Beuerlein says. “In other words, although the median projection came out as three cuts, it was a close call that could have been changed by the forecast of a single committee member.”

Beuerlein points out that many economic reports in March came in stronger than expected, justifying the Fed’s current stance of patience.

This “last mile” in getting inflation down to the Fed’s 2% target is proving to be the most challenging as its efforts have been working gradually since June 2022.

“The ongoing resilience of the economy causes the Fed to be less concerned about the lagged impact of the tightening of the past two years, and more focused on the potential impact of lowering rates too soon,” Beuerlein contends.

As for the data, the leading economic indicators (LEI) ticked higher in February following 23 consecutive months of decline. The biggest positive contributor to the LEI was the improvement in the length of the average workweek, while the biggest negative contributor was interest rates.

Although inflation-adjusted disposable personal income declined in February, overall consumer spending was stronger than anticipated in February, driven by spending on services.

The labor market’s strength showed up in the March employment report with non-farm payrolls in the establishment survey rising by 303,000 — the largest gain since May 2023. Those numbers showed a significant rise in part-time jobs created and persons holding multiple jobs.

For those reasons, the FOMC at its mid-March meeting kept the target range for the Fed Funds rate at 5.25% to 5.50%.