7/19/24: 2024 Monetary Policy Outlook: Fed Rate Cut Expected in September Amid Positive Economic Indicators

Expectations surrounding the trajectory of monetary policy adjustments in 2024 and beyond remain in focus for investors. The market is pricing in a near 100% probability of a September 18 twenty-five basis point reduction in the Fed Funds rate, a view the Chandler team shares. Expectations for additional reductions in the Fed Funds rate are mixed with the market split between one or two additional cuts in 2024. Although we are observing some deterioration in select economic indicators, and the employment outlook continues to normalize, consumer behavior remains consistent with the soft-landing narrative at the moment (soft landing = positive but below trend growth and a moderately higher U3 unemployment rate). The Chandler team continues to scrutinize the outlook for employment in 2025 and beyond and provided the backdrop does not materially weaken, we believe the overall adjustment to monetary policy in this cycle will be measured.

US Retail Sales data was released on Tuesday morning, July 16 and the results surprised to the upside relative to consensus expectations. Most notably, the Retail Sales Control Group number, which feeds directly into GDP, came in at 0.9% month over month compared to the consensus expectations of 0.2%. Additionally, there were some upward revisions to the Control Group prior releases, supporting the positive outlook for GDP growth in the near term. Weekly jobless claims ticked higher, coming in at 243k for the week, with the four-week moving average at 235k. Some of the weakness in jobless claims is being attributed to the impact of Hurricane Beryl in Texas. In thinking about the data from a coincident indicator perspective, the Chandler team is looking for the 4-week moving average to move above 250k for a few weeks in a row to be indicative of a more pronounced weakness in the employment outlook, a threshold we continue to avoid.

Next week the market will be provided with additional data points to assess the overall economic outlook. On Thursday, July 25, the advance report for 2Q GDP will be released, with the Bloomberg consensus estimate currently at 1.9%. The widely follows Atlanta Fed GDPNow forecast is predicting a more constructive number of 2.7% as of the July 17 updated release, adjusting moderately higher from previous estimates, correlated with updated numbers on housing starts and industrial production. On Friday, the market will receive an update on Personal Income, Personal Spending, and most notably the Personal Consumption Expenditure (PCE) index on headline and core inflation. The PCE core number is forecasted to print at 0.2% on a month-over-month basis, and provided the index prints at the 0.2% level for the balance of the year, the PCE core year-over-year number as of December 2024 will be around 2.8%. We believe the forecasted moderating trends in month-over-month PCE core inflation will provide the Federal Reserve with the ability to reduce the Fed Funds rate at a quarterly cadence in the second half of 2024.

Next Week:

Chicago Fed National Activity Index, Existing Home Sales, S&P Global US Manufacturing and Services PMIs, New Home Sales, 2Q GDP advance report, Personal Consumption, GDP Price Index, Core PCE quarter-over quarter, Jobless Claims, Durable Goods, Personal Income, Personal Spending, PCE Inflation, and UofM sentiment indicators

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