Consumer inflation increased 0.1% in November and 3.1% over the last 12 months, following October’s 3.2%, according to the Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI), released Dec. 12. Now, some experts say that this latest set of data might further bolster the Federal Reserve’s case to cut rates next year-although when remains the question.
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Once again, shelter prices continued to be a major driver-increasing 6.5% in the last year, offsetting a decline in gas prices, which were down 6% in November.
This latest CPI is in line with expectations, as economists surveyed by The Wall Street Journal estimated consumer prices overall rose 3.1% from a year earlier. In terms of the core CPI- which excludes food and energy prices- it was expected to post a 4% gain, the same as October.
“The November CPI was right in line with consensus expectations and continued the trend of moderating inflation, ” said Jeff Rosenkranz, portfolio manager for Shelton Capital Management. “Progress in the fight against inflation is slowing, and the key question is will inflation stall out at 3-4% and require the Fed to keep rates high for longer or will progress continue and allow for rate cuts in 2024?”
Indeed, the inflation data — still a bit off from the Fed’s 2% inflation goal — also comes one day ahead of its last Federal Open Market Committee (FOMC) meeting of the year. Yet, it’s a big improvement compared to where it stood in November 2022, at 7.1%, according to BLS data.
While Fed officials are expected to hold rates steady, just as they did in November, some experts now also see them having reason enough to start cutting them around spring of next year.
And this was also underscored in a new CNBC Fed Survey, which found that the Fed will begin cutting rates next year, with June being the first month for which more than half of respondents have a reduction built in, rising to 69% by July.
Amy Magnotta, co-CIO at Ategenos Capital, said that while inflation has not yet come down to the Fed’s 2% target, it is trending below the Fed’s estimates for 2023, and the disinflation process looks to be well established.
“The Fed has signaled that if inflation continues to slow, they will be able to cut rates,” she said. “We would view rate cuts in response to falling inflation as a readjustment of policy, and it would be balanced by the other part of the Fed’s dual mandate – maximum employment.”
When Could The Fed Start Cutting Rates?
Thomas Hogan, senior research faculty at the American Institute for Economic Research said that the big question from the December meeting is what the FOMC members predict for 2024.
“The median FOMC projection is that inflation -PCE inflation, not CPI- will fall to 2.5% in 2024 and that the fed funds rate will be cut to 5.1% by the end of 2024,” he said. “If inflation appears to be coming down, then we should expect their economic projections to show lower projections for inflation and the Fed funds rate, indicating they will begin cutting rates sooner than previously expected.”
Other experts, such as Ategenos Capital’s Magnotta, agreed, saying that the Fed could start cutting rates even earlier in the year than what was initially expected.
“If inflation continues to slow more rapidly than expected, and inflation expectations are anchored toward the 2% target, we could see the Fed acting as soon as the March 2024 meeting,” she said. “Market expectations are currently just below 50% that the target policy rate will be lower in March but show an 80% probability for a lower target rate following the May FOMC meeting.”
Another factor that could give Fed officials impetus to cut rates is the expectation that shelter prices — both rent and owner’s equivalent rent — will come down, according to Rosenkranz.
“We believe that the housing-related components of inflation will start to show through in coming months, because they work through the statistics with a long lag due to sampling and data collection methods and the delayed reaction higher rates have on the housing market overall,” he said, adding that this progress will give the FOMC the confidence they need to start to lower rates in late Spring or Summer 2024 so that they don’t leave real interest rates too high which would run the risk of overcorrecting.
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What Would Lower Rates Mean for Consumers?
“It’s going to be very interesting to hear what Jerome Powell has to say tomorrow – while there’s no doubt that inflation is continuing to come down, I suspect that Powell will stress that the Fed is not yet ready to declare victory in the fight against inflation,” said Ted Rossman, senior industry analyst, Creditcards.com.
And according to him, what’s most important for consumers is that even when rate cuts begin, it’s going to be a gradual process.
The average credit card, for example, charges a record-high 20.72% and most cardholders are facing rates that are 5¼ points higher now than they were at the beginning of last year, he noted.
“Whether your card charges 21% or 20% or 19% is almost irrelevant – they’re all high. That’s why the advice is to take matters into your own hands and pay down the debt ASAP, perhaps with the aid of a 0% balance transfer card,” he said.
In addition, he underscored the fact that housing remains a sore spot, too.
“The average 30-year fixed-rate mortgage rate recently crossed 8% for the first time since 2000. It’s back down to 7.23%, but still, that’s more than double the 3.27% we saw at the end of 2021. Redfin says 80% of current homeowners have a rate below 5%. It could be years before mortgage rates revisit those levels,” he said.
In turn, Rossman argued that “higher for longer” is on the table.
“The best consumer advice is to be diligent about paying down debt, especially variable-rate debt such as credit cards and HELOCs which have risen substantially over the past two years,” he said. “We’re probably at least three months away from a rate cut, and even once that process starts, it could well be baby steps – quarter-point increments.”
Will Another Pause Trigger a Stock Rally?
Experts seem to be cautious about this.
“The stock market tends to be forward-looking, and we’ve seen a nice rally since the end of October as expectations for a Fed pivot arose,” said Magnotta, adding that the S&P 500 Index has gained more than 12% since Oct. 27.
She added, however, that while she remains positive on equity markets through year-end but is more cautious as we enter 2024.
“If inflation continues its downward trajectory and the Fed can readjust the policy rate to meet market expectations, it will be supportive for risk assets,” she said. “However, a deeper rate-cutting cycle would mean growth is a concern, which would be a more challenging environment for the stock market.”
Shelton Capital’s Rosenkranz echoed the sentiment, saying that while there may be a stock market rally, it may be short-lived as the underlying reason for lower rates, a rapidly slowing economy, is usually bad news for corporate earnings and stock prices.
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This article originally appeared on GOBankingRates.com: Why the Fed Could Cut Interest Rates in Spring 2024, According to Experts
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