AMSCI NEWSLETTER April 2024

If an interest rate reduction were a piece of fruit, the U.S. economy would be the mythological figure Tantalus, constantly reaching for it, but never quite able to grasp it.

Not long ago, members of the Federal Reserve – who, in this scenario, are akin to the Olympian gods who deemed that the object of desire should remain just out of reach – was expected to soon begin to reduce rates for the first time since their anti-inflation campaign of rate hikes began in March 2022. In fact, as many as three rate cuts were widely expected this year.

However, inflation, while having eased, has remained stubbornly high, refusing to sink below 3 percent, much less approach the Fed’s target of 2 percent. As a result, the lower rates that appear so close keep receding.

“The recent data have clearly not given us greater confidence [that inflation has been contained] and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Federal Reserve Chair Jerome Powell said on April 16. He added, “Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us.”

As for other members of the Fed’s Federal Open Market Committee, which sets the target range for the Federal Funds Rate (currently 5.25 to 5.5 percent), the minutes of the committee’s most recent meeting on March 19-20 note that “Participants generally commented that they remained highly attentive to inflation risks but that they had also anticipated that there would be some unevenness in monthly inflation readings as inflation returned to target.”

“Participants judged that the policy rate was likely at its peak for this tightening cycle, and almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected,” the minutes recorded. “In support of this view, they noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven.”

In March, the consumer price index showed a 3.5 percent increase from a year earlier, while prices jumped 0.4 percent from February, the second straight month of 0.4 percent inflation, according to the Bureau of Labor Statistics.

“The index for shelter rose in March, as did the index for gasoline,” the bureau stated. “Combined, these two indexes contributed over half of the monthly increase in the index for all items. The energy index rose 1.1 percent over the month.”

Notably, the year-over-year core inflation rate, which excludes food and energy and, as a result, is often lower than the overall rate, was 3.8 percent in March. This was largely because of increasing shelter costs, which rose 5.7 percent and accounted for 60 percent of the increase in the core rate.

One factor that could encourage a rate reduction sooner rather than later is that the economy underperformed in the first quarter. While analysts had expected an annualized growth rate of around 2.2 percent for the January through March period, the actual number was 1.6 percent, well below both projections and the Q4 rate of 3.4 percent, according to the Bureau of Economic Analysis.

As has become standard in recent years, monthly job creation is strong, with the economy adding 303,000 positions in March, the Bureau of Labor Statistics reported. The unemployment rate is now 3.8 percent and has been below 4 percent since February 2022.

Confidence among manufacturers, as measured by the Institute for Supply Management Purchasing Managers Index, showed its largest gain in three years and crossed the threshold that indicates expansion in the sector for the first time since September 2022.

“Demand remains at the early stages of recovery, with clear signs of improving conditions,” the chair of the institute’s Manufacturing Business Survey Committee said. “Production execution surged compared to January and February, as panelists’ companies reenter expansion. Suppliers continue to have capacity but are showing signs of struggling, due in large part to their raw material supply chains.”

Consumer confidence has not moved much in recent months. The March Consumer Confidence Index from The Conference Board was essentially unchanged from February.

“Over the last six months, confidence has been moving sideways with no real trend to the upside or downside,” the board’s chief economist said, adding, “Consumers remained concerned with elevated price levels, which predominated write-in responses. March’s write-in responses showed an uptick in concerns about food and gas prices, but in general complaints about gas prices have been trending downward.”

A separate measure, the Index of Consumer Sentiment from the University of Michigan Surveys of Consumers, dipped 1.9 percent from March to April.

“Sentiment moved sideways for the fourth straight month, as consumers perceived few meaningful developments in the economy,” the Surveys of Consumers director said. “Since January, sentiment has remained remarkably steady within a very narrow … range.”

Housing starts in March fell 14.7 percent from February and 4.3 percent from March 2023, according to the Census Department and the Department of Housing and Urban Development. Existing home sales decreased by 4.3 percent from February to March, the National Association of Realtors reported.

“Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves,” the association’s chief economist said.

The Dow Jones Industrial Average closed at 37,986.40 on April 19, recording a year-to-date gain of 0.8 percent. The S&P 500 Index ended the same day at 4,967.23, up 4.1 percent on the year. The Dow fell 5.2 percent between March 28 and April 17, while the S&P dropped 4.5 percent between April 11 and April 19.

The dollar on April 19 was trading at 0.94 euros, 0.8 pounds, 154.54 yen and 7.24 yuan.

The Federal Reserve Federal Open Market Committee has six meetings remaining in 2024, with the next one to be held on April 30-May 1. No major action is expected, though. In fact, given the inflation statistics, many analysts are now looking to the fall, at the earliest, for a rate reduction.