I expect a Fed Rate Cut in July Despite Market View of 18.5 Percent Chance

At the risk of looking silly, I think the market is wrong about the odds of a Fed rate cut in July. Let’s discuss why.

The June Fed meeting is a week from now, June 12. The market view is a 99.7 percent chance of no change with a 0.3 percent chance of a hike.

10 Reasons Why a Rate Cut in July

1. In general, data is weakening across the board. Real disposable income has been negative in two of the last there months.
2. The BEA made a large negative revision to GDP and GDI.
3. Consumer spending took a dive in April and I expect it will stick this time.
4. Terrible reports from Target and Walmart on discretionary consumer spending.
5. There have been numerous negative revisions in most of the recent hard data.
6. Job openings are plunging.
7. The GDPNow forecast is plunging fast.
8. I finally expect rent to break the string of 32 consecutive months of rising at least 0.4 percent.
9. The July meeting is nearly two months away, on July 31. There is plenty of time for further economic weakening and that is what I expect.
10. There is no meeting in August. If the Fed is at all concerned about slowing, but not wanting to risk being too late (not that it will matter, but that is how the Fed thinks), the Fed will find a reason for a July cut.

What Will It Take?

To cut rates, the Fed will need some combination of weak jobs, rising unemployment, and improving year-over-year inflation.

There are two chances for a poor jobs report. The Bloomberg Econoday forecast for May is 195,000 jobs. That report is in two days. The July jobs report is on Friday, July 5.

There are also two chances for improvement in the CPI.

The BLS will release the Consumer Price Index for May 2024 on Wednesday, June 12. There will be another chance for enough improvement to satisfy the Fed for the June report released mid-July.

Dramatically Weakening GDPNow Forecast

Weakening Hard Data

May 24: Another Massive Revision, This Time Durable Goods, What’s Going On

May 23: New Home Sales Sink 4.7 Percent on Top of Huge Negative Revisions

May 22: Discretionary Spending Tumbles at Target, Shares Drop 10 Percent

May 22: Existing-Home Sales Decline 1.9 Percent, Sales Mostly Stagnant for 17 Months

April 15: Elon Musk Fires 10 Percent of Tesla Workforce, Prepares for “Next Phase of Growth”

A Second-Quarter Recession This Year Looks Increasingly Likely

This morning I commented A Second-Quarter Recession This Year Looks Increasingly Likely

As I watch the evolution of consumer spending, housing starts, new home sales, and GDPNow trends, it appears the economy has peaked.

A rate cut is consistent with weakening data as long as there is further improvement in the year-over-year CPI and/or weakening jobs.

Finally, if the Fed is looking to cut rates before the election, there are only two chances, July and September. There are no Fed meetings in August or October.

Important note: This does not change my long-term inflation forecast. The Fed will struggle to keep inflation near 2.0 percent. I will do a follow-up on this idea.