Fed Watch – 11/8/2024

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

Hi, everyone. This is Eric Post. I’m the Economic Consulting Managing Director here at ITR Economics. And this is the November 8, 2024 edition of FedWatch.

So we have a lot going on. We have an election result. We have a 25 basis point cut from the Fed. We have some long-term interest rates drifting upward. We have some new macroeconomic data points. And of course, the most pertinent question to you all is, what do you do with all of this information? So we’re going to tackle all that here today in five short minutes.

So let’s get started. So on the interest rate side, we have a 25 basis point cut here in November. And that’s coming on the heels of a 50 basis point cut in September. So 75 basis points overall. That puts us at still a somewhat elevated Fed funds rate relative certainly to a low interest rate era pre-pandemic or even initial period of the pandemic. But we’re starting to see some relief. That’s going to free up working capital for some firms who borrow on a short-term basis to fund those needs and help us in 2025. But keep in mind, it’s a lagged effect. There’s not an instantaneous economic response to those short-term rates being cut.

And as we look off into the future, what do we see the Fed looking at? Well, of course, they’re looking at prices and they’re also looking at the jobs market. On the pricing side of things, when we look at personal consumption, expenditures, prices, excluding food and energy, that’s one of the Fed’s preferred metrics. It’s been at either 2.7% or 2.6% for the last five months in a row. So it has edged down certainly from where it was at the height of the pandemic supply chain shortages and stimulus fueled inflation rise, but we’re having some stickiness in inflation.

Overall, we are seeing inflation edge lower. So if you include food and energy, you get 2.1% inflation that’s continuing to ease. And that’s because food and energy prices are either dropping in the case of energy, or we’re really seeing sub 2% inflation as in the case of food. So food right now at home is up 1.3% from one year ago, certainly elevated food prices, but the inflation rate is much more under control.

We think that that is going to be tricky for the Fed to ignore altogether because when you look at housing, CPI for housing, switching from the PCE price index now over to the CPI here for a second, but when you look at housing prices, those are up 4.1% that that would be over the last 12 months and services are up 5.0% over the last 12 months, even stickier. And so when we’re looking at those particular inflationary elements, we have a shortage of housing and even more so we have shortages in certain components of the service sector and stickiness in some wages or outright healthy wage gains. It’s gonna make it difficult for the Fed to cut rates too, too, too much more, we think. So are we gonna get some relief? Yes, but don’t be banking on interest rates to go be back to pre-pandemic norms.

Another reason for that is the labor market is most certainly cooling when you look at job openings for the third quarter, those are down 16% from job openings from the third quarter of 2023. That could seem scary on the surface, but when you look at unemployment at 4.1% and you see the GDP numbers that are out there and you see even those job openings are still elevated relative to pre-pandemic norms in terms of levels, we still have a pretty healthy jobs market going on.

So yes, are we likely to see some relief in interest rates? Sure, but market relief, that is unlikely. Long-term rates on the other hand, we saw the 10-year government bond increase 37 basis points over the course of October, edged up a little bit more in November and as of the eighth year, it’s sitting at about 4.3% for 10-year money. That’s not nearly as high as the 5% that it briefly touched in October 2023, but it’s not as low as it was when it was below 4% here a little bit a couple months ago, a month or two ago, so before October.

So why are those long term interest rates going up? Well, investors are looking at economic growth prospects. They’re looking at inflation prospects, including based on what they’re seeing in the jobs data, based on what they’re seeing the likelihood in terms of government expenditures, and they are demanding that kind of interest rate to justify parking their funds in treasuries. So it is a bit expensive there, not as expensive as it was, but a bit more expensive for long term money than it was a couple of months ago.

So what do you do with that information? Well, let’s Consider some of the economic backdrop as well. When you look at the leading indicators, our ITR leading indicator is edged upward weekly, but it’s edging upward signaling a bit of a better 2025, not markedly better, but a bit better for some sectors. The Manufacturing Purchasing Managers Index was below 50, it was 46.5 for October, but the services, non-manufacturing PMI was at 56 and that’s the highest level, it’s a diffusion index. So that’s a little bit different, but basically it’s the services side is doing very well. That’s the Lehman’s interpretation of that 56 number.

So certainly we have growth ahead, what are you to do? Well, I’m working out here now and thinking in five years, we are going to be on the doorstep of the 2030s depression. It’ll be late 2029. And so if I’m trying to consider as a business, do I invest now, do I wait, what do I do? I’m thinking of all those probabilities and thinking it is going to be time to really think about what investments can you do that have a three, four, five year payback, not a seven year payback, not a 10 year payback because that puts us into the teeth of that depression period. What are some things you can do as interest rates have come down a little bit on a short term basis. We may see a bit more of relief on a long-term basis. We’re looking at that forecast very carefully to see if we’ve reached the long-term interest rate low or if it’s still a bit off into the future.

But bottom line for me is if I’m a business, I’m really making my plans now and trying to figure out that payback rather than time that interest rate trough absolutely perfectly. And so really looking off into the future, those next three, 4 to 5 years and thinking in a world where inflation is going to be present, in a world where margin squeeze is going to be present, how can I be more efficient?

That’s the thing we urge you to focus on despite all of these other things going on out there in the world right now. So thank you so much and we hope you tune in to the next FedWatch. Thank you.