Hot US economy dampens hope for rate cuts

Economic data across multiple indicators is in the spotlight, showing the strength of the U.S. economy and the persistence of inflation in the last mile downhill to the Federal Reserve’s target rate of 2%.

If the consumer price index (CPI) reaches an annual rate of 3.5% in March, there is a possibility that interest rates will be lowered from the expected start in June. As of Wednesday morning, there was only a 21% chance of a June rate cut, according to CME FedWatch’s predictive algorithm.

The algorithm makes a rate cut more likely than a pause in the current range of interest rates from September, 5.25% to 5.5%.

“The lack of downward momentum in core inflation will be met with some discomfort domestically.” [Fed]In particular, some Fed officials are increasingly wary of cutting rates amid persistent inflation,” EY senior economist Lydia Boussour and chief economist Gregory Daco said in an analysis on Wednesday.

“Nevertheless, many will adjust their views after observing the value of their preferred inflation measure, PCE inflation, later this month,” they wrote in a Commerce Department personal I wrote this in reference to the Consumer Expenditures (PCE) price index. inflation.

‘Core’ inflation rate rises for the first time in a year

The CPI rose 0.4% in March, an annual increase of 3.5%, beating analysts’ expectations. This was the third consecutive month of increase of 0.4% compared to the previous month.

The CPI rose for the first time in a year, rising to 3.79% from 3.76% in February, as the less predictable categories of food and energy prices were excluded.

Inflation has been declining since mid-2022, falling from an annual rise of 9% to 3.2% in February.

But the final percentage point leading to 2% annual inflation is proving to be the most difficult, as the CPI has hovered between 3% and 4% for nearly a year.

The 3.5% increase in March is still not the highest for the same period, as the CPI reached 3.7% in August last year.

Profits have reached record highs and production remains strong.

After-tax profits hit a record high of $2.8 trillion in the fourth quarter of 2023, surpassing the previous high of $2.7 trillion in the third quarter of 2022, according to federal data.

Earnings rose 3.9% in the quarter, far beating economists’ expectations of a 3.3% rise.

Profit as a percentage of price grew throughout 2023, rising from 15.9 percent to 17.1 percent of the price per unit of value added in the economy. Meanwhile, employee compensation in 2023 fell from 57.7% to 57.3% of prices, with the remainder of the difference made up by falling input prices, reinforcing the argument for profit-driven inflation.

Gross domestic product (GDP) has also surged on the back of stimulus money injected into the economy after the pandemic, setting the 2020s to a new trend line that is steeper than it was a decade ago.

GDP grew at an annualized rate of 3.4% in the fourth quarter, after increasing by 4.9% in the third quarter. As of April 4, the Atlanta Fed forecast quarterly growth for the first quarter of 2024 at an annualized rate of 2.5%, although the forecast has been above 3% for most of the year.

Labor market remains hot, but not in favor of workers

Job creation in March was much higher than expected, with 303,000 new jobs added to the economy.

Job growth in March was driven by a limited number of sectors, including health care, government, and generally low-wage leisure and hospitality industries.

The job market shattered expectations throughout 2023, as immigration contributed to the growth of the labor force and helped alleviate what business groups often refer to as a “labor shortage.”

Employment remains strong, with the unemployment rate remaining below 4 percent of the workforce, but the turnover rate, widely seen as an indicator of worker independence, has declined and is at its post-pandemic high of 3 percent. It has fallen from 2.2% to 2.2%. .

Similarly, the ratio of open jobs to job seekers has fallen from 2 open jobs to less than 1.5 jobs per job seeker over the past two years.

Wages and salaries are falling.

Even though profits are soaring and inflation is only growing at 3-4 percent a year. Wage growth is slowing This trend continues with Wednesday’s CPI release.

The real average hourly wage for non-managerial workers, which subtracts the 0.2% increase in earnings from the 0.4% increase in CPI, fell 0.2% from February to March, the Labor Department reported.

Nominal profits for non-management positions fell from 7% growth in 2022 to 4.2% growth in March.

Nick Bunker, director of North American economic research at US-based Indeed, told the BBC: “There is now less competition to hire workers and therefore less need to raise wages.” .

“The number of job openings has fallen significantly, but the supply of workers has increased.”

Fed officials were already questioning the timing of the rate cut.

Markets and Fed officials had signaled before Wednesday’s inflation data that interest rates could remain high for an extended period of time.

Fed Chairman Jerome Powell said at an event last week, ahead of the release of the latest CPI data, that it’s “too early to tell whether the recent numbers are anything more than just an uptick.”

“We do not believe it is appropriate to lower the policy rate until we have greater confidence that inflation is sustainably declining towards 2%.”

Atlanta Fed President Rafael Bostic suggested last week that a rate cut could occur by the fourth quarter.

“If the economy progresses as I expect, with GDP and unemployment remaining strong and inflation declining moderately throughout the year, I think it would be appropriate to start reducing the rate at the end of the year.” Four quarters,” he said on CNBC.