Fed Watch – 9/13/2024

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hello, I’m Brian Beaulieu. Thank you for joining us for this edition of Fed Watch. Today is September 13th, 2024, and we’re probably about five days away from seeing some movement on the downside by the Federal Reserve.  

We had thought maybe a year ago you were watching, we thought maybe it could come in June, but they seem to have delayed it until September. It’s not a foregone conclusion, but they’re meeting on September 18th, and we expect that they’re going to drop it. The big debate seems to be whether it’s going to be 25 bips or 50 bips, and you know what, that ITR economics, doesn’t matter. At least they’re breaking the ice, and we don’t expect them to be one and done.  

Let’s run through some of the economic scene, and you’ll understand, I think, a little bit better why we think that way. One is, if you are a subscriber to the ITR Trends Report, you read about this in the executive summary, we have some leading indicators, key ones that had been rising, rather hesitantly, but at least they were rising, and now they’re keeling back over. It’s forming a W bottom instead of a V, or what had been a lazy U. Seen it before, it changes up the timing of when the low is going to come, and we think that’s what we’re going through right now.  

The Fed is also going to be able to look at the employment data and get some justification for easing up on interest rates there. Not that the employment gains have been bad, they’ve just been on the weak side. The 1/12 rate of change for not seasonally adjusted employment in the private sector is up 1.4%, and that’s on the low side of normal. It’s definitely in the sluggish territory. It’s similar to what we saw in 2019. In 2019, we were going through a soft part of the business cycle. The indicators had begun to turn up, and then COVID hit, as we all know, in 2020. Without a COVID, this should be a redux of 2019, where we’re going to stay sluggish into 2025, and then we’re going to get that upturn. But for now, they can look at the employment data and say, hmm, we can ease up a little bit.  

They can also look at the CPI data that came out yesterday. That showed an overall CPI rate down to 2.5%, which is a big hoorah. Their precious core inflation is a little bit higher still. Core is at 3.2%. They would like that to be at 2.5. But unless they’ve become extremely dogmatic, they can take the CPI overall at 2.5 and call it a win.  

It’s the same game that we’ve been seeing over the course of the last several months. Food is modest at 2.1%. Energy is down at 4.0%. It’s the service side of things, that is keeping things up. And that means the wage component is keeping this up. And I think that’s probably a tell that it’s going to be a 25 bip, not a 50 bip. But the odds makers, I’m putting it at about a 50-50 bet at this particular time.  

The PPI showed a modest increase for August at 1.7% using these seasonally adjusted data. Using the not seasonally adjusted data, it was actually up only 0.2% year over year. So both numbers are fine. And both are going to allow the Federal Reserve to declare a victory. Interestingly enough, a lot of our clients are pleased that there’s some inflation showing up in the PPI because they can get some price relief going forward. It’s been very, very tough on margins.  

And when we looked at the breakdown in the PPI data, indeed, we’re seeing some improvement in margins for wholesalers and retailers, not for transportation and warehouse margins. Those seem to continue to be relatively depressed. But in other producer services, we’re seeing that the margins have been reported as getting better. And that’s certainly good news for business and good news for keeping the economy out of overall trouble.  

Whole sale trade had been… I’ve been showing this to clients when I’ve been doing presentations, slowly getting better. We’ve seen the rates of change improving modestly over the course of 2024. That’s pretty much stalled out right now. The 3/12 rate of change for our wholesale trade, durable goods, is fluctuating between 1.5 and 2.6%. Remember, that’s a nominal dollars. After you take out inflation, even at 1.7% seasonally adjusted, there’s very little, if any, real growth going on there. It’s just a flat period where people feel like they’re in the doldrums. Same thing with non-durable goods that had been the stronger play, and now that’s softened up also running with a 3/12 at about 2.1%. Again, that’s barely covering the rate of inflation, so not much to crow about there.  

There’s a lot going on as we go through this season, and a lot of people have been asking about the election. What’s the election going to do about this? What’s the election going to do about that? As you know, we are apolitical at ITI Economics. The election and whether it’s going to be President Trump or President Harris has nothing to do with our outlook for what’s going on.  

More importantly, for the longer term outlook, for those of you that are interested, and we’ll talk about this more at the December 2024 webinar that Alan and I will be doing, our last one together, is recent changes contemplated being made anyways. They haven’t announced the date yet at the Bank for International Settlements. That’s an interesting wrinkle for the future. It has nothing to do with these interest rate declines, but it has a lot to do with long -term future interest rates, and we’ll discuss that later as it becomes more pertinent. What’s going on? Thank you for watching this edition of FedWatch, and I’ll see you next Friday.