Wall Street at new highs? For Schroders Fed rate cut only from June
Schroders: 'We expect the first rate cut to take place in June, followed by an easing at every other meeting until the end of 2024'
3' min read
3' min read
Wall Street updates highs, stock exchanges discount positive scenarios but bets of a Fed rate cut are looking ahead. Among these views is that of Schroders economists who believe a cut in March is premature. Here's why
Inflation slowdown
.Exactly one year ago, Federal Reserve Chairman Jerome Powell received a video call from someone he thought was Ukrainian President Volodymyr Zelensky. Instead, it was a pair of Russian pranksters, who later released a clip in which Powell seemed to claim that the central bank did not know of a 'painless way to bring down inflation'. Although the Fed questioned the veracity of the clip, most economists agreed that a recession or anaemic growth was necessary to achieve price stability.
US GDP growth
.However, in the following 12 months the US economy proved remarkably resilient in the face of restrictive rates, with GDP growth estimated at 2.5% and a monthly average of 225,000 non-farm payrolls. Over the same period, the core CPI fell from 5.7% to 3.9% and inflation fell even more if we exclude the housing category, which dominates 40% of the index. Based on this narrower measure of the core CPI, prices are now only 2.2% higher than a year ago.
Housing inflation seems to be coming back into trend, thanks to falling rents. Core goods prices are likely to remain stable or even decline, even taking into account the recent Red Sea disruption. What is less certain, however, is whether core services net of housing (or 'supercore') will moderate. Since this is the truest reflection of domestic price pressures, this will determine whether and when the Fed will cut rates this year.
Labour costs
.The development of 'supercore' inflation this year will largely depend on developments in the labour market, as personnel is the biggest cost for most service providers. Encouragingly, much progress has been made in rebalancing the labour market after the pandemic. Hiring intentions have been gradually reduced and immigrants are replacing workers who have retired early. In addition, the number of people leaving work has decreased, which suggests that there is less turnover and competition for workers.
