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Wall Street updates its highs, the stock markets are discounting positive scenarios but bets on a rate cut by the Fed look ahead. Among these opinions, that of Schroders economists who believe a cut in March is premature. Here because
The slowdown in inflation
Exactly one year ago, Federal Reserve Chairman Jerome Powell received a video call from someone he thought was Ukrainian President Volodymyr Zelensky. Instead, it was a pair of Russian pranksters, who later posted a clip in which Powell appeared to say that the central bank didn’t know a “painless way to bring inflation down.” Although the Fed questioned the veracity of the clip, most economists agreed that a recession or anemic growth is needed to achieve price stability.
US GDP growth
However, over the following 12 months the US economy proved extraordinarily resilient in the face of restrictive rates, with GDP growth estimated at 2.5% and a monthly average of 225,000 non-farm payroll workers. Over the same period, core CPI fell from 5.7% to 3.9% and inflation fell even more if you exclude the housing category, which dominates 40% of the index. Based on this narrower measure of core CPI, prices are now just 2.2% higher than a year ago.
Housing inflation appears to be returning to trend, thanks to falling rents. Prices of basic goods are likely to remain stable or even decline, even taking into account the recent disruptions in the Red Sea. What is less certain, however, is whether core services excluding housing (or “supercore”) will moderate. Since this is the closest reflection of nationwide price pressures, this will determine if and when the Fed cuts rates this year.
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The cost of labor
The path of “supercore” inflation this year will largely depend on labor market developments, given that staff is the largest cost for most service providers. It is encouraging to note that much progress has been made in rebalancing the labor market after the pandemic. Hiring intentions have been gradually reduced and immigrants are replacing workers who retired early. Additionally, the number of people leaving their jobs has fallen, suggesting there is less turnover and competition for workers.