Hope of a Fed rate cut in July is has all but vanished. But more than one cut are now priced in by December.

Data from CME Fedwatch, calculation and chart by Mish.

I thought there was a decent shot at a July cut. That’s all but totally priced out so I removed July from the chart. But the odds of a cut for September went up and December is now up to two full cuts.

There is no meeting in August, October, or February.

Further Progress on Inflation

Fed Chair Jerome Powell met with the Senate on Tuesday and will meet with the House on Wednesday.

Please consider Powell’s Remarks Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

Recent indicators suggest that the U.S. economy continues to expand at a solid pace. Gross domestic product growth appears to have moderated in the first half of this year following impressive strength in the second half of last year. Private domestic demand remains robust, however, with slower but still-solid increases in consumer spending. We have also seen moderate growth in capital spending and a pickup in residential investment so far this year. Improving supply conditions have supported resilient demand and the strong performance of the U.S. economy over the past year.

In the labor market, a broad set of indicators suggests that conditions have returned to about where they stood on the eve of the pandemic: strong, but not overheated. The unemployment rate has moved higher but was still at a low level of 4.1 percent in June. Payroll job gains averaged 222,000 jobs per month in the first half of the year. Strong job creation over the past couple of years has been accompanied by an increase in the supply of workers, reflecting increases in labor force participation among individuals aged 25 to 54 and a strong pace of immigration. As a result, the jobs-to-workers gap is well down from its peak and now stands just a bit above its 2019 level. Nominal wage growth has eased over the past year. The strong labor market has helped narrow long-standing disparities in employment and earnings across demographic groups.

Inflation has eased notably over the past couple of years but remains above the Committee’s longer-run goal of 2 percent. Total personal consumption expenditures (PCE) prices rose 2.6 percent over the 12 months ending in May. Core PCE prices, which exclude the volatile food and energy categories, also increased 2.6 percent. After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

The Committee has stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. Incoming data for the first quarter of this year did not support such greater confidence. The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.

Rate Cut Signal

The market took those last two paragraphs as a signal the Fed is prepared to cut rates in September.

If rent behaves (goes up less than the current pace of at least 0.4 percent for 33 months) or unemployment rises further, or the economy enters recession look for the Fed to be more aggressive with rate cuts than my lead chart shows, but not wildly so.

My base case is all three of the above. We find out about rent with the CPI report on Thursday. The Bloomberg Econoday forecast is 0.1 percent. That’s a tough over-under line but I’ll take the under.

A Recession Has Already Started

On July 8, I commented Weak Data Says a Recession Has Already Started, Let’s Now Discuss When

I’ve seen enough. A recession has started. Let’s discuss starting with a very good indicator that has few false positives and no false negatives.

Looking further ahead, I do not sense a strong recession. That will preclude strong action by the Fed.

Covid was very short and extremely deep. This recession will be a longer period of shallow stagnation.

Both Biden’s and Trump’s tariff polices are inflationary. The budget is a mess, and any decline in the rate of inflation is likely to be transitory. Rates are not going back to zero.

The Fed may struggle with this weakness for years, unable to do much because global wage arbitrage and just-in-time manufacturing have been replaced with contentious, inflationary trade wars coupled with weak demographics.

More By This Author:

What Is The Breakeven Employment Needed To Prevent Rising Unemployment?
Weak Data Says a Recession Has Already Started, Let’s Now Discuss When
How Much Faith Do You Have In BLS Job Reports?