The Federal Reserve will cut rates this year

Financial markets are like small children: mercurial, impatient, and often petulant. Today, equity markets and the market for U.S. Treasurys are overly pessimistic about monetary policy by theover the balance of the year. A few months ago, market participants believed that the Federal Reserve would cut interest ratesand also inflation as measured by the personal consumption expenditure price index, caused the market to ratchet back expectations about interest rate cuts.

The minutes from the most recent meeting of the FOMC, April 30-May 1, indicate that the most recent inflation news has been disappointing. Consequently, monetary policy must remain restrictive. Moving forward, the FOMC will continue to focus on the data. The members of the committeeconsistent progress toward the Federal Reserve’s 2% core PCE inflation target. On Friday, the FOMC should get data that show that the path to 2% inflation is back on track.

Over the past few weeks, yields on Treasurys have popped back up. Mortgage rates have followed the Treasury market. Mortgage applicationson wage inflation which will ultimately determine the path of inflation. Wages and prices will converge. The Conference Board believes that the labor marketHouseholds are more pessimistic about the jobs market. Though the government’s data on employment show a resilient labor market, households are at ground zero for the employment market.

The commercial real estate market remains troubled. There are early signs of a deteriorating labor market. Interest rate cuts by the Federal Reserve should occur by September. Moreover, monetary policy is very restrictive; so, the market should soon anticipate two rate cuts by year-end. The Federal Reserve will ensure that nothing “breaks” in the economy.

James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes

Source: News Formal (newsformal.com)

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