AMSCI Newsletter October 2024

Members of the Federal Reserve, prior to reducing interest rates by a half-point in September, expressed somewhat varying views about the state of the U.S. economy.

While “almost all participants saw upside risks to the inflation outlook as having diminished, while downside risks to employment were seen as having increased,” there were some differences in analyses of the labor market and overall economy, according to the minutes of the Federal Open Market Committee’s (FOMC) Sept. 17-18 meeting. “A couple of participants … did not perceive an increased risk of a significant further weakening in labor market conditions,” the minutes noted.

The target range for the Federal Funds Rate had been 5.25 to 5.5 percent for more than two years going into the meeting, and a reduction of at least a quarter-point was considered a near certainty. The minutes stated that “a substantial majority of participants supported lowering the target range for the federal funds rate by 50 basis points” – partly to “help sustain the strength in the economy and the labor market while continuing to promote progress on inflation” – but “some participants” preferred a cut of half that size because “inflation was still somewhat elevated while economic growth remained solid and unemployment remained low.”

Fed bankers also discussed the importance of messaging, stressing that the rate cut should be regarded as a move toward “normalization” of monetary policy, not as a reaction to perceived concerns about an impending recession.

“Participants emphasized that it was important to communicate that the recalibration of the stance of policy at this meeting should not be interpreted as evidence of a less favorable economic outlook or as a signal that the pace of policy easing would be more rapid than participants’ assessments of the appropriate path,” the minutes recorded.

In the end, all FOMC members but one voted for the half-point reduction, with the dissenter favoring a quarter-point cut.

The back and forth could provide clues into how the committee will vote when it next meets on Nov. 6-7. Another rate cut is thought to be possible, but much will depend on inflation and jobs data that is released before then.

In September, the Consumer Price Index (CPI) was 2.4 percent higher than a year earlier, the smallest 12-month increase since February 2021, according to the Bureau of Labor Statistics. This was down slightly from 2.5 percent inflation the previous month. On a month-to-month basis, prices increased 0.2 percent, the same as from July to August.

“The index for shelter rose 0.2 percent in September, and the index for food increased 0.4 percent,” the bureau reported. “Together, these two indexes contributed over 75 percent of the monthly all items increase.”

Energy costs were down 6.8 percent from September 2023, with gasoline falling 15.3 percent and fuel oil dropping 22.4 percent.

The Fed’s target for inflation is 2 percent. In June 2022, inflation hit a recent high of 9.1 percent.

The bureau also reported that the economy added 254,000 jobs in September, the largest number in six months, with notable gains in food services and drinking places, health care, government, social assistance, and construction. The unemployment rate has decreased a tenth of a point in each of the past two months and is now at 4.1 percent.

While the moderate inflation number makes a November rate cut possible, the strong hiring numbers likely make another 50 basis point reduction – and maybe even a 25 point cut – less probable, especially in light of comments by Fed Chair Jerome Powell on Sept. 30, prior to the September jobs report, that “This is not a committee that feels like it is in a hurry to cut rates quickly.”

This CPI report was the last one before the central bank’s November meeting, though there are other measures of price trends. October jobs data will be released on Nov. 1.

Another closely watched economic measure – consumer confidence – is trending negative, according to two organizations. The Consumer Confidence Index from The Conference Board fell 7 percent from August to September to “near the bottom of the narrow range that has prevailed over the past two years,” according to the board’s chief economist.

“September’s decline was the largest since August 2021 and all five components of the Index deteriorated,” the chief economist said. ‘Consumers’ assessments of current business conditions turned negative while views of the current labor market situation softened further. Consumers were also more pessimistic about future labor market conditions and less positive about future business conditions and future income.”

The Index of Consumer Sentiment from the University of Michigan Surveys of Consumers, meanwhile, dipped 1.7 percent from September to October, though the surveys’ director noted that this was “well within the margin of error.”

“While inflation expectations have eased substantially since [inflation peaked in June 2022], consumers continue to express frustration over high prices,” the director said, adding, “With the upcoming election on the horizon, some consumers appear to be withholding judgment about the longer term trajectory of the economy.”

Confidence among manufacturers continues to show weakness, as the Institute for Supply Management’s Purchasing Managers Index was unchanged from August to September, remaining at a level indicating contraction in the sector for the sixth consecutive month and the 22nd time in the past 23 months.

Five industries reported growth in September, while 13 reported contraction.

“Demand remains subdued, as companies showed an unwillingness to invest in capital and inventory due to federal monetary policy – which the U.S. Federal Reserve addressed by the time of this report – and election uncertainty,” the chair of the institute’s Manufacturing Business Survey Committee said.

Housing starts in September were essentially unchanged from August and from September 2023, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales in August slipped 2.5 percent from July and were down 4.2 percent from a year earlier, the National Association of Realtors reported.

“Home sales were disappointing again in August, but the recent development of lower mortgage rates coupled with increasing inventory is a powerful combination that will provide the environment for sales to move higher in future months,” the association’s chief economist said.

The median existing home price in August was 3.1 percent higher than in August of last year.

The Dow Jones Industrial Average closed at 43,275.91 on Oct. 18, up 14.8 percent on the year and 4 percent in the month since the Federal Reserve announced its interest rate cut. The S&P 500 Index was at 5,864.67 on Oct. 18 for a year-to-date gain of 23 percent. The S&P matched the Dow’s 4 percent growth since the Fed announcement.

The dollar on Oct. 18 was trading at 0.92 euros, 0.77 pounds, 149.59 yen and 7.1 yuan.