Expect the Fed to cut rates for first time in May: Economist

Fri, Feb 16, 2024, 1:04 PM

January's inflation and consumer data evoked a rollercoaster of actions in stocks (^GSPC, ^DJI, ^IXIC) this week. Are these economic prints worrisome indicators for stagflation?

PNC Chief Economist Gus Faucher joins Yahoo Finance Live to share his positive outlook on the greater economic picture despite January's readings and how it ties all back to the Fed's monetary policy.

"I don't want to read too much into one month's worth of data. if you look at data over the past three months, over the past six months, they point to slowing inflation, gains in consumer spending, and a very good labor market with a very low unemployment rate and good wage growth," Faucher explains. "And I don't think that overall story has changed."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

JOSH LIPTON: US consumers raised their optimism about the economy in February to cap off what was a week that offered investors a complicated picture. For more on the outlook on the economy, let's now welcome in Gus Faucher, PNC chief economist. Gus, you are just the man I want to talk to today, Gus, because I'm trying to make sense of this economic data, and I know our viewers are as well. They're looking at it, Gus, and they see, you know, PPI higher than expected, CPI higher than expected. Retail sales were weak, Gus. How do you make sense of this data? Should we be-- should we getting worried about stagflation here, Gus?

GUS FAUCHER: I don't think so. I think that the CPI and PPI numbers came in a little hot for January, but the trend has definitely been for a slowing. I think that we'll continue to see housing inflation in particular slow. Slower-- weaker rents make their way into the CPI numbers with a lag, so I'm expecting that to start to show up later this year.

And then the consumer fundamentals continue to look very good. The job market is good. Wage growth is solid. Inflation is slowing, and that gives consumers more real spending power. So I think the outlook is pretty solid for 2024. And, in fact, we've moved away from a baseline recession forecast. Now we think the most likely outcome is a bit softer growth in 2024 but still solid, and that will allow the Fed to cut rates later this year.

JULIE HYMAN: Gus, this is really interesting. So basically what you're saying is the data that we got this week doesn't really change the calculus, right, that we had sort of going into the week here for disinflation still continuing and the economy sort of puttering along.

GUS FAUCHER: That's right. I don't want to read too much into one month's worth of data. If you look at data over the past three months, over the past six months, they point to slowing inflation, gains in consumer spending, and a very good labor market with a very low unemployment rate and good wage growth, and I don't think that overall story has changed. I think that when we get the data for February, it will show that inflation is continuing to slow and that consumers are continuing to do well.

JOSH LIPTON: And, Gus, this is a question for an economist like yourself, so I'm glad we have you. When we look at PPI and CPI, Gus, what does that potentially tell us about what PCE is going to say? Because that, of course, is the Fed's preferred inflation gauge.

GUS FAUCHER: That's right. I think that PCE tends to run a bit slower than CPI. That being said, if we had an increase in CPI for the month, I'd expect to see an acceleration in PCE inflation over the month. But again, I think the longer-term trend is for lower inflation.

If we look at the last six months of the core PCE, which is what the Fed is focused on, that's actually been slightly below their 2% objective when you annualize it. So maybe it ticks up a little bit in January, but I think by the time we get the February data in March, it will show that inflation is continuing to soften and that it looks like we'll hit that Fed 2% inflation objective sometime late in 2024.

JULIE HYMAN: So if we're not hitting that objective until late in 2024-- I mean, we did hear Mary Daly say today the Fed should not wait until we get there. They should start cutting before then. So what does your timeline look like?

GUS FAUCHER: I would expect to see the Fed start cutting the fed funds rate sometime in May of this year and then four 25-basis-point rate cuts over the course of 2024. Even when the Fed starts to cut, monetary policy will still be contractionary. It will still be weighing on economic growth, just not as much as it was previously. So I think the Fed can cut rates, you know, in the late spring, early summer of this year, make monetary policy a bit less contractionary, and we should continue to see inflation slow through the end of this year.

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Expect the Fed to cut rates for first time in May: Economist

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