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| ECONOMIC UPDATE |
| The Morse Code Signal! |
| AUGUST 2024 |
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| For most of us, Morse code is not in our repertoire–one would need a decoder ring to translate the message. The FOMC meeting concluded this week, and investors intensely looked for clues on the Fed’s target date to start cutting interest rates. Whether you say “dots and dashes” or “dits and dahs,” it does not matter. The FOMC written statement tends to be more cryptic in nature as they resist providing definitive forward guidance. While we as individuals may be confounded by the Fed’s cryptogram, the market clearly decoded the message that interest rates will come down soon. |
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| What were the coded words? |
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Policymakers made several adjustments to the language in their statement:
- They added the word “eased” when referencing inflation and said “there has been further progress toward the 2% inflation objective.”
- They dropped the word “robust” when referencing the job market and replaced it with “moderated” along with adding “the unemployment rate has moved up but remains low.”
- They shifted their stance to state that the “risks to achieving its employment and inflation goals continue to move into better balance,” rather than prior wording focused just on inflation risk.
The statement distinctly shows the change in tone by the Fed, indicating that we are closer to rate cuts.
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| What were the Chair’s comments? |
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Fed Chair Jerome Powell does not provide forward guidance; rather, the committee and himself are data dependent in making a “live” decision at each meeting. However, in the Q&A session, he provided more clarity. He does have to walk a fine line but presented an overall message that the market liked. Powell iterated that the committee has gained confidence that inflation has come down toward their 2% target. Powell highlighted that there has been a significant movement downward in the labor market and the economy shows few signs of weakness, as evidenced by the advanced Q2 estimate of GDP of 2.8% growth.
Overall, the message was that conditions are now back to 2019 levels. They will need to see how the economy continues to evolve, although Powell stated that rate cuts “could be” on the table at the next meeting. The market has already fully priced in a September Fed rate cut. There are two more inflation and job reports before the next meeting (September 17-18), and the data could change considerably before then. Analysts believe the best time to provide a definitive signal would be at Fed Chair Powell’s Jackson Hole address in late August. |
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| What do we need to see for the Fed to cut? |
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We need to see continued moderating job and wage growth, and inflation to continue to ease down for the Fed to cut rates. Headline inflation has come down to 2.5% and core at 2.6% on a year-over-year basis, while the three-month annualized rate was 2.3%. However, the super-core PCE (the Fed’s preferred gauge of inflation) which excludes food, energy, and housing, rose last month 0.2%, 3.43% annualized. If this proves to be sticky, it makes the decision much harder. The Fed is not only focused on the risks that inflation presents, but also on employment and the health of the economy as a whole. Hiring has slowed and has become more concentrated in a handful of industries and the number of job openings relative to unemployed workers has returned to 2019 levels.
This week, another reading on the job market showed private payrolls increasing only 122,000, the fewest since the beginning of the year. Wage growth slowed to the smallest pace since 2021. Several industries cut jobs last month, led by professional services, information, and manufacturing. If conditions in the market substantially deteriorate, Powell felt confident that the Fed has ammunition to do more if they need to. He has stated before that a 0.25% rate cut won’t do much. So, if we do see a cut in September, we may expect another one before the end of the year. |
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| How is the consumer faring? |
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We know that in Q1 the New York Fed reported a rise in delinquency rates for credit cards and auto loans across various age groups. Philadelphia Fed’s report showed credit card balances that are overdue reached an all-time high since collection of the data series began in 2012. Anecdotally, we continue to hear these balances and delinquencies increasing in Q2. While consumers have traditionally driven economic growth, these reports indicated that financial strains are mounting. Retailers, such as Walmart and Target, have said in the last couple of months that they are seeing the consumer pull back on expenditures. In food service, we heard from Starbucks, which missed on revenues and reported a decline in same-store sales for the second consecutive quarter. McDonald’s, considered as value-conscious centric, reported its first sales decline since the pandemic.
The University of Michigan’s Consumer Sentiment Index has dropped to an eight-month low. The Federal Reserve issues a summary of commentary on current economic conditions by each federal reserve district (aka the Beige Book). In the report, all 12 districts reported retailers discounting items and consumers only purchasing essentials or trading down. These signs of stress throughout the economy should be enough for the Fed to start cutting rates in September, but one cut may not be enough this year to quell these indications of financial strain on American consumers. |
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| …and did you hear the code? That is Morse code. “On July 12, 1999, the nation’s final message in Morse code was sent out to sea from a remote Bay Area radio station. But every July 12, the golden age of maritime radio comes back to life. The last surviving Morse code ratio station – KPH, established in Point Reyes and Bolinas in 1913 by the American Marconi Co. and run by the Maritime Radio Historical Society – will exchange messages with Morse code enthusiasts around the world, including memorials and a salute to now-silent coast stations.” SiliconValley.com, Bay Area News Group. July 12, 2024. Don’t worry, Fremont Bank will continue to send out these Economic Updates in plain language, as always! |
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