Fed could unleash ‘series of cuts’ on soft jobs data: Economist

Consumer sentiment has dropped by over 10% month-over-month in May, according to the University of Michigan’s survey, while still beating monthly forecasts. In recent comments from this week, Atlanta Federal Reserve President Raphael Bostic believes interest rates will continue to run higher for longer as progress against inflation slows.

Citi Chief US Economist Andrew Hollenhorst sits down with Yahoo Finance’s Catalysts to weigh in on where the Fed currently stands on interest rates as it maneuvers an increasingly challenging inflationary environment for American consumers.

“The economy does need to cool down if you’re going to cool down inflation. I’m not that worried about the PMI [Purchasing Managers Index] number showing that the economy is accelerating. If you take it very literally, that is kind of what it shows, but you want to look at it in the context of all the data. This is one survey where you ask firms are you expanding, are you contracting?” Hollenhorst details. “We have hard data on the consumer. We see retail sales that are weaker… So I’m really not seeing it in the broad swath of data. Yes, those PMIs were stronger. It’s something to note, but I don’t think it’s the story of the economy right now.”

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

This post was written by Luke Carberry Mogan.

Video Transcript

High prices and high interest rates are weighing in on the consumer, weighing on the consumer and the Fed members are throwing cold water on hopes that rates could be coming down anytime soon.

We got a flood of Fed Speak this week.

All cautioning patients with rate cuts.

Atlanta Fed President Rafael Bostic saying on Thursday, we gotta be a little more patient and more certain that inflation is on its way to 2% before making a move on rate cuts.

So how can we expect the Fed’s policy to impact the consumer going forward?

Joining us?

Now we’ve got Andrew Hollenhorst who is the city chief us economist here.

Andrew.

I mean, so many Fed speakers this morning, it almost gives even more credence to what uh Liz Ann Saunders over at Charles Schwab called them the Federal Open Mouth Committee.

Um Of course, we’re gonna get that printed on T shirts that is yet to come and on the Yahoo finance merch website yet to be uh established all that considered.

What do you make of this Fed speak that we got in droves this week?

I I think this is really what we should expect at this point in the cycle, which is a difficult point in the cycle for FED officials.

And you’re making all the right points here that we have sticky inflation.

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On the one hand, on the other hand, we have labor markets that look to be softening a consumer that’s pulling back.

So they’re trying to thread the needle between the price mandate and the employment mandate, trying to tackle inflation, trying to keep the unemployment rate low.

And that’s just a difficult thing to do.

So what you hear from fed officials, inflation has been stronger.

So they’re gonna say patients, patients, we’re not gonna cut yet right up until the point when we see the data really weaken in a significant way and then you’ll get the cut.

So it’s really the data that’s gonna matter here.

Not what we hear from FED officials, Andrew, how are you looking at that PM I report yesterday because businesses activity there accelerating the fastest pace that we’ve seen in two years.

So stronger than expected report, you rekindling just some of the concerns surrounding inflation.

Maybe it’s going to be even tougher than the market had antici than had initially anticipated, any forecasters had initially anticipated in terms of taming inflation.

Do you see any truth to that or do you think maybe the numbers weren’t as strong as what they looked like on the surface?

So I think the economy does need to cool down if you’re going to cool down inflation.

I’m not that worried about the PM I number showing that the economy is accelerating.

If you take it very literally, that is kind of what it shows.

But you want to look at it in the context of all the data.

This is one survey where you ask firms, are you expanding?

Are you contracting?

We have hard data, we have hard data on the consumer.

We see retail sales that are weaker.

You were talking in the previous segment about retailers, restaurants that are cutting prices to attract consumers.

So I’m really not seeing it in the broad swath of data.

Uh Yes, those PM is were stronger.

It’s something to note, but I don’t think it’s the story of the economy right now.

What is the story of the economy?

Well, I I think it’s a lot of these factors that we’ve been waiting for to come through and slow the economy that finally are where we have high interest rates.

We have prices that have risen very significantly over the past few years.

And that just hadn’t slowed the economy as much as most forecasters ourselves included would have expected.

And part of that was because there was so much excess savings, the economy, there was so much spending power and that just kept the US economy resilient and running.

And now we’re finally seeing that, that slowing and that means the data is gonna be a little bit mixed, right?

We’re gonna get some of these reports that look weaker, some that look stronger, but the trend is towards a slowing economy now.

So Andrew, what does that then tell us about rate cuts this year?

And then looking out to 2025 more specifically the rate of those cuts potentially next year.

So we heard a lot from fed officials this week, maybe most notably from Governor Waller who said in his view, inflation will slow but so gradually that you maybe he would support a rate cut late this year, maybe early next year.

And what that’s telling us is that sticky inflation is making it harder for fed officials to cut rates.

And that just puts more emphasis for me on the employee mandate and what we’re going to see there.

If the jobs numbers hold up, then it could be a fed that stays on hold for longer.

I think we are going to see softer jobs numbers.

We just see that in so much of the forward looking data.

Now, if they see that, then all of a sudden we’ll have this pivot to the employment mandate.

We’ll have the fed cutting this year.

And I do think that once they start cutting, it will be a series of cuts.

We actually heard that from Governor Waller who said, you know, this is not just going to be one rate cut and then we wait for six months.

This will be a series of rate cuts.

Once we get started, I mean, Andrew, look, we came into this year.

I, I pictured by that at this point Memorial Day Weekend with all the cuts that were sold to me, I’d be sitting around on somebody’s lawn, maybe with some flip flops on and we’d have two or three cuts already by this juncture.

And then that would leave to question for the rest of the year.

Ok. Where does the, the consumer mindset move?

Where does the employment situation move?

Right now, we’re hearing a little bit more from the consumer who are concerned right now over the labor markets expecting unemployment rates to rise and income growth to slow.

What will that do in terms of the pass through effects towards the fed actually getting towards their inflation target and reading targets in order for them to see reason to cut?

Yeah.

So you thought we would be there by now?

Markets thought we would be there by now and fed officials thought that and they were looking at the end of 2023 at 2% core P ce inflation for six months.

And so they really thought that maybe they tackled inflation, maybe there wouldn’t be this last mile problem.

All of a sudden we got the Q One data in and it became very clear to everyone.

There is a last mile problem.

The economy has to slow to slow inflation and that puts the fed in a much more difficult scenario because they can’t be pre emptive.

They can’t exactly what you’re saying.

What they would like to do is to cut rates before the consumer slows down before the unemployment rate moves up.

Well, now the unemployment rate is moving up, the consumer is slowing down and we’re still waiting for inflation to come down.

So it, it’s, it’s that trade off the classic macroeconomic trade off between growth and inflation and the longer rates stay higher.

The more risk there is of a sharper slowing in the economy.

All right, Andrew Hollenhorst.

Always great to talk to you.

Thanks so much for hopping on with us this morning.

City’s Chief US economist.

We appreciate it.

Have a good weekend.

Thank you.