Rickards: No Fed “Pivot” Tomorrow

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The Federal Open Market Committee (FOMC) of the Federal Reserve is meeting today and tomorrow for the purpose of discussing the economy and setting monetary policy going forward.

What does it mean for markets and your money? Today we’ll explore those questions. Let’s first start off with what we know.

We know that tomorrow, the Fed will leave its target rate unchanged. That decision will keep the federal funds target at 5.50%. Why am I so confident about saying that?

Over the course of 19 FOMC meetings beginning March 16, 2022, I’ve been correct in all of my forecasts, including the policy rate pause that began in September 2023. I’m confident I’ll be correct tomorrow also.

In addition, I expect the Fed will do nothing to contradict prior indications that the rate hike cycle that began in March 2022 is over. In effect, the Fed has concluded that they have reached the terminal rate. That’s the rate at which inflation is expected to come down on its own without further rate hikes.

No Dots

In the Fed’s view, the lagged effect of prior interest rate hikes will do the job of lowering inflation to the Fed’s target of 2.0%. No further action is required. It’s just a matter of time and patience.

This FOMC announcement tomorrow will not include an updated Summary of Economic Projections (SEP), known as the “dots.” These are forecasts of interest rates, unemployment and economic growth offered by members of the Board of Governors of the Fed and regional Federal Reserve Bank presidents.

The dots have been wildly inaccurate in the past. While the dots are technically unimportant and usually wrong, they’re played up in the media. It’s a relief that there will be no dots from this meeting for the media to chew over. There will be a press conference by Fed Chair Jay Powell after the meeting.

Inflation Still Has the Fed Sitting Tight

The reason for the Fed not cutting rates (the infamous “pivot” that Wall Street has been wrong about for two years) is that the Fed is losing the battle against inflation.

When inflation (measured monthly by CPI on a year-over-year basis) dropped from 9.1% in June 2022 to 3.0% in June 2023, the Fed was ready to declare victory. Its goal was still 2.0% annualized inflation, but progress from 9.1% to 3.0% was so dramatic that 2.0% seemed well within reach. It was around that time (July 2023) that the Fed hit the pause button on further rate hikes.

Since then, the inflation news has been consistently bad for the Fed.

Here’s the tale of the inflation tape using the Consumer Price Index on a year-over year basis:

No Sign Inflation’s Going Away

Several facts jump out immediately from this most recent 13-month time series. The first is that inflation isn’t going down in a convincing way. It’s true that inflation dropped from 3.3% in May to 3.0% in June. But the June 2024 3.0% reading is identical to the June 2023 3.0% reading.

In other words, inflation hasn’t moved at all in over a year.

Inflation has bounced around somewhat over the past 13 months, including spikes to 3.7% in August and September 2023. Still, inflation hasn’t budged materially from the 3.1% level reached in January 2024.

The best that can be said is that inflation is in a range of 3.0–3.7% with a central tendency of about 3.3%. It’s been stuck in that range for over one year and is not trending toward the Fed’s stated goal of 2.0%.

Importantly, even if the drop from 3.3% in May to 3.0% in June is the beginning of a sustainable downward trend (that’s not yet clear), it’ll take at least two more months of positive data to convince the Fed that this is a trend and not just another monthly gyration.

That takes a July rate cut off the table and probably September too.

“Outliers”

For purposes of analyzing inflation, I use the headline CPI number. The reason is simple — that’s the number that everyday Americans actually pay at the grocery store and the gas pump, so it’s the best number for understanding behavioral responses, changes in expectations and political implications.

The eggheads at the Fed and Wall Street have devised “core CPI” (excluding food and energy), “super-core CPI” (excluding food, energy and housing), “core PCE” (a completely different index that the Fed prefers that also excludes food and energy), “trimmed-mean CPI” (this measure disregards the highest and lowest figures as “outliers”) and so on.

These measures are devised by economists who must not have enough to do. I understand them all, but I also understand that they’re abstractions that don’t sync up with what people actually pay. Show me someone who doesn’t spend money on food, gas, home heating and rent and maybe I’ll pay attention, but not sooner.

That said, when the Fed claims to be data dependent, they rely on more than just the unemployment rate and CPI. Here’s a summary of recent data, some supporting a rate cut by the Fed and some suggesting the Fed will do nothing…

The unemployment rate ticked up to 4.1% in the June employment report. Oil prices have trended down from $86.90 to $75.50 over recent weeks. Consumer savings are largely depleted and credit cards are maxed out.

Higher rates for credit cards are headwinds to consumption. Higher rates for mortgages are a headwind to home purchases and consumer durables. Inverted yield curve continues to signal a coming recession. Most job creation is in part-time jobs. Jobs are going largely to illegal aliens

Data Supporting No Rate Cut

The Atlanta Fed GDP nowcast for Q3 24 = 2.8%. Second-quarter GDP grew at an annualized rate of 2.8%. Job creation remains solid, up by 206,000 jobs in the June employment report. Labor force participation moved up to 62.6% from 62.5% in the May employment report. The unemployment rate remains historically low (4.1%) despite recent increases.Regular gas at the pump has trended up from $3.49 per gallon to $3.51 per gallon in the past month.

These data aren’t given equal weighting by the Fed. The inflation rate is the dominant factor in a world where job growth remains strong.

Given a mixed bag of data and continuing inflation above targets, the Fed will simply do nothing. Waiting another month or two for more data is what this Fed does best. They’re in no hurry to do anything right now.

We’ll learn more during Jay Powell’s press conference on the Fed’s future plans. At this point, it’s clear the Fed won’t cut rates at this week’s meeting and is unlikely to cut rates at the Sept. 18 meeting. Even if inflation cools off next month, the Fed won’t be prepared to pivot to rate cuts that quickly.

A September Rate Cut? Not So Fast

Another powerful factor likely to negate a rate cut at the September meeting is the proximity of that meeting to the Nov. 5 presidential election. Any rate cut in September will be viewed as political interference by the Republicans and could jeopardize Fed independence if Trump wins the election, which seems likely at this stage.

The Fed would prefer to keep their heads down and avoid a firestorm. There will be ample time in November and December to cut rates after the election.

Market commentators point to the fact that the CME fed funds futures contract now assigns a 100% chance to a rate cut in September. My rejoinder is that the predictive analytic value of this futures contract on actual Fed policy is zero.

This contract taken on a three-month forward basis for the past three years has always been wrong. The contract is nothing more than a reflection of the Wall Street “soft landing” and “pivot” narratives that have been wrong since late 2022.

It looks like they’re wrong again.

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