US Federal Reserve Chair, Jerome Powell, speaks at a press conference following a Monetary Policy Committee meeting at the Federal Reserve in Washington, DC, on 12 June 2024. AFP.
May’s consumer price index (CPI) data was very soft. Overall prices were unchanged last month and, excluding food and energy, rose just 0.16%, the weakest pace since August 2021. The chart shows headline inflation dipped from 3.4% to 3.3% and core inflation fell from 3.6% to fresh three-year lows of 3.4%.
Source: Bank of Singapore, Bloomberg
May’s data is the second month core prices have eased after increasing by an uncomfortably high 0.4% each month in 1Q24. Though rents continued to rise 0.4% for owners’ equivalent measures and actual tenancies, core goods prices and core services-ex housing both dipped by -0.04%. The latter’s decline was the first since September 2021 as transport costs plunged 3.2% in May on lower airfares and car insurance stopped rising sharply.
Source: Bank of Singapore, Bloomberg
The Federal Reserve also met overnight. The Fed kept its fed funds rate at 5.25-5.50% given inflaiton is still above its 2% target as the chart shows. But its forecasts were surprisingly trimmed to show only one 25bps cut was now expected on average in 2024.
We keep our view, however, that the Fed will ease by 25bps each in September and December to the benefit of risk assets and the detriment of the USD.
Firstly, May’s data shows price rises are abating. The outright declines last month in core goods prices and core services ex-housing may not be sustainable. However, rents are likely to ease this year according to market surveys, keeping inflation on track to reach the Fed’s 2% goal over the next couple of years rather than stay above 3%.
Secondly, Fed officials were split on rate cuts this year. Eleven forecast no or only one 25bps move in 2024. But eight anticipated two cuts. Chairman Powell also downplayed the projections observing May’s inflation data was ‘encouraging’ while the forecasts showed ‘conservatism’. He also indicated ‘most people generally don’t’ update their projections during the Fed’s meetings. Thus, May’s data isn’t likely to have been included in the latest forecasts.
Lastly, the Fed’s 2025 and 2026 projections anticipate interest rates being cut four times each year in line with our view that once officials start easing, the fed funds rate will be reduced on a quarterly basis. We thus stick to our outlook of two Fed rate cuts in 2024.
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