Recent attention has once again turned to the issue of inflation in the United States, with questions such as when will interest rates be lowered, by how much, and whether there is a possibility of a rate hike. Views from Federal Reserve officials, economists, and market participants vary on this matter. This week, the core PCE price index will be released, which is the inflation indicator most closely watched by the Fed. The Consumer Price Index (CPI) for April in the United States was 3.4%, slightly lower than the 3.5% in March, but still higher than the 3.1% and 3.2% in the first two months of the year, indicating persistent inflation risks and the potential for further changes in Fed interest rate decisions throughout the year.
Minutes from the May policy meeting of the Federal Reserve indicated, “Several participants noted that they would be willing to further tighten policy if inflationary risks materialize appropriately.” “Participants discussed risks and uncertainties around economic outlook. It is generally believed that uncertainty remains regarding inflation and there is mutual agreement that recent data has not increased their confidence in inflation returning to 2%.”
Federal Reserve Governor Michelle Bowman expects that U.S. inflation will remain high in the long term and reiterated that the possibility of restarting rate hikes is not ruled out if needed. Bowman stated, “If the upcoming data suggests a halt or reversal in combating inflation progress, I am still willing to raise the federal funds rate target range in future meetings.”
Currently, two Wall Street investment firms, Jefferies and Mizuho, also anticipate that the Federal Reserve will not lower interest rates within the year. In addition, Shaan Raithatha, senior economist at Vanguard Group, a top U.S. asset management company, stated that the Fed is unlikely to lower rates in 2024. Torsten Slok, Chief Economist at Apollo Global Management, also predicts that the Fed is likely to maintain the benchmark interest rate unchanged throughout the remaining time in 2024.
Expectations for a rate cut this year in the capital markets have significantly diminished. Interest rate futures traders are betting that there may be only one rate cut for the remainder of the year, with November being the most probable and followed by December. The likelihood of two rate cuts occurring throughout the year is now less than 50%, significantly reduced from around 70% probability earlier in May.
Previously, Jamie Dimon, Chairman and CEO of JPMorgan Chase, expressed a more pessimistic view, stating that while the likelihood of a “hard landing” for the U.S. economy is small, it is not zero.
Dimon said, “I see a range of outcomes, and the worst outcome for all of us is stagflation, high interest rates, and a recession. This means that corporate profits will decline, but the world has gotten through it. However, I think the possibility of a hard landing is higher than what others imagine.”
On the other hand, Federal Reserve Governor Christopher J. Waller holds an optimistic view on a decline in inflation and states that no rate hike is necessary. Waller mentioned on May 21 at the Peterson Institute for International Economics that the April inflation data indicates progress towards 2% may have already resumed, showing that U.S. inflation has not accelerated, and further rate hikes are not essential.
Waller stated that U.S. private domestic final purchases grew by 3.1% in the first quarter of this year, nearly matching the growth rate from the second half of 2023. Waller noted that he will closely monitor whether the data in the second quarter will continue the pace seen in the first quarter.
Despite the latest reports of composite output PMI and manufacturing PMI rising in the United States, Waller is particularly concerned about the non-manufacturing PMI. He expressed surprise that the Non-Manufacturing PMI, which holds the largest share of output, fell below 50, reaching its lowest level since December 2022, indicating a slowdown in economic activity. He stated that if these trends persist, it would mean that economic activity outside of manufacturing is decelerating.
Waller mentioned that U.S. retail sales in April remained steady, with data from the first two months being revised downward, indicating potential consumer spending reductions. Additionally, credit card and auto loan delinquency rates have risen to pre-pandemic levels, indicating pressure on certain consumer segments. However, service expenditure data appears to remain robust and should support overall spending for the current quarter.
On May 21, Waller mentioned that if data continues to soften over the next 3 to 5 months, the Fed could lower interest rates by the end of this year or early next year.
Waller, considered one of the most prominent Federal Reserve officials, is speculated by some analysts to be a potential successor to Jerome H. Powell if Donald Trump were to return to the White House next year.
U.S. economist Huang Dawei told Dajiyuan that even with the current upward pressures on inflation, the effectiveness of raising rates is limited.
Huang Dawei explained, “The primary cause of inflation in the United States is the excess quantitative easing (QE) over the past three years due to the pandemic. However, after absorbing a significant portion of the excess currency in the past two to three years, the current inflation is mainly driven by external factors, relating to U.S. energy policies and geopolitical risks.”
Huang Dawei stated that external factors mainly include factors like war, geopolitics, etc., leading to price pressure. In comparison to 2022, this year has witnessed ongoing conflicts such as the Russia-Ukraine war, tensions in the Strait of Hormuz, the Red Sea crisis, and escalating trade tensions between the U.S. and China, intensifying global costs of oil and supply chain disruptions. These factors present significant challenges to achieving the 2% inflation target for the United States through rate hikes.
Huang Dawei also noted that the U.S. unemployment rate is not significantly higher compared to pre-pandemic levels in 2019, remaining below 4% with the continuous rate hikes, performing better than expected. Long-term stability in the U.S. economy can be anticipated.
Data released by the U.S. Department of Labor (DOL) on May 23 showed a further decline in initial jobless claims last week. As of the week ending May 18, seasonally adjusted U.S. initial jobless claims stood at 215,000, below the market’s expectation of 220,000, marking the largest continuous decline since September of last year.
Furthermore, earlier data from the U.S. Bureau of Labor Statistics revealed that the U.S. unemployment rate in April slightly increased to 3.9%, compared to the market’s initial expectation of remaining steady at 3.8%.
North American investment advisor Mike Sun stated to Dajiyuan that the current resilience of the job market is supporting robust consumer spending, providing momentum for economic growth. He believes that the current high-interest rates will at least continue until the second half of the year.
In addition, data recently released by S&P Global showed that the U.S. composite output PMI for May rose from 51.3 in April to 54.4, hitting a 25-month high, surpassing the market’s expectation of 51.1. The service sector business activity index PMI for May also rose from 51.3 in April to 54.8, marking a 12-month high and exceeding the market’s expectation of 51.3.
Simultaneously, the U.S. manufacturing PMI for May rose from 50.0 in April to 50.9, reaching the third-highest record in the past 20 months, exceeding economists’ expectations of 50.0. The manufacturing output index PMI for May also rose from 51.1 in April to 52.4, reaching a two-month high and maintaining its strength.