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CAPITAL IDEAS: The Fed’s Jackson Hole meeting should reveal when we will get interest rate relief

At its July meeting, I expect the Fed will tee up the possibility of an interest rate cut, confirm it at its Jackson Hole Economic Policy Symposium in August, and perhaps cut rates at its September 18, 2024 meeting.

Investors recently received some welcome inflation news, something we have not been able to say very often over the previous couple of years. Before highlighting the good news, let’s review the path of inflation since its cycle peak for some crucial context.

The Consumer Price Index (CPI) rate of inflation topped out at 9.1 percent in June 2022. In October 2022, CPI remained at a painfully high rate of 7.7 percent. I wrote a column that month citing my belief that inflation would be cut in half within a year; CPI soon dropped like a rock to three percent by June 2023.

The following month, in July 2023, I wrote that I expected the S&P 500 to return to its previous highs as CPI drifted to 2.5 percent in the second half of 2024. A year later, the stock market index is trading around all-time highs, and inflation drifted lower. However, I was wrong. How so? Keep in mind that the CPI isn’t the only measure of inflation. Due in part to some technical factors related to tracking shelter costs, the CPI remains above its level from a year ago. We still have six more months to see if those technical bumps get smoothed out.

The CPI was explicitly cited in my July 2023 article; there is no intention to change the goalposts regarding forecasts. That said, if we used the Federal Reserve’s preferred inflation metric, the core Personal Consumption Expenditures Index (PCE) inflation has nearly hit the 2.5 percent target. Core PCE for May 2024 came in at 2.6 percent year over year, down from 2.8 percent the previous month and lower than the 4.7 percent rate a year ago.

Admittedly, 2.6 percent is not 2.5 percent, but a) it is directionally correct, b) both CPI and PCE suffer from measurement flaws, and c) the second half of 2024 has only just started! CPI and PCE track shelter costs using “owner’s equivalent rent” (OER). OER is calculated by calling homeowners and asking them how much rent they would charge tenants if they weren’t living there. If you replace that fakakta survey with actual rent data, as most developed nations do, then inflation has been at or near the Fed’s two percent target for months.

Chart courtesy of The Real Economy Blog.

That calculation improvement results in what is called the harmonized index of consumer prices. The Fed could hit its inflation target in 2025 even without properly harmonizing the inflation rate. According to Redfin, the typical U.S. home sold during the four weeks ending June 23, 2024 transacted at 0.3 percent less than its asking price. This is the first time home sale prices have been at a discount since the start of the pandemic.

In 2023, the discount was flat; buyers paid the asking price. In 2022, people spent two percent above the asking price, the peak premium above asking. This 0.3 percent discount was the first observation since the pandemic when houses sold for less than the asking price. It is an indication that housing prices could soften.

Home prices are still too high; the median price of an existing home sold in May 2024 was $419,300, a record-high price and up 5.8 percent year over year. The law of supply and demand played a role in pushing up home prices. Many homeowners hold sub-four percent mortgage rates, which compare to the roughly seven percent average 30-year mortgage available today. Households with low mortgage rates have hesitated to list their homes for sale to avoid losing their low mortgage rate.

Fewer sellers have meant less supply, which has prompted higher prices. However, a year ago, the active listing count of houses for sale in the U.S. was 582,441. Today, the inventory is 787,722, more than one-third more. Increased inventory should help curb the rapid pace of housing inflation, which could prompt the Fed to cut interest rates.

In late 2023, the consensus expectation was that the Fed would make six interest rate cuts in 2024. I argued that was “absurd” and that the Fed should not cut rates in 2024. What the Fed should do and what they will do are two different conversations. My base case for the Fed’s interest rate cuts in 2024 was just one in December. I now believe there is nearly a 50-50 chance of an earlier cut.

At its July meeting, I expect the Fed will tee up the possibility of an interest rate cut, confirm it at its Jackson Hole Economic Policy Symposium in August, and perhaps cut rates at its September 18, 2024 meeting. There is a 25 percent chance that their first cut this cycle will be in September, a 25 percent chance it will be on November 17, and a 50 percent chance that the Fed’s first cut will be at their December 18 meeting.

Currently, the futures markets assign almost no chance of a cut at the Fed’s July meeting and more than a 60 percent possibility of a cut at its September meeting.

Chart courtesy of the CME Group.

So far, the stock market has performed well, “knowing” that a rate cut will come. If the Fed doesn’t properly jawbone a cut this year and act on it, the S&P 500 could decline by as much as 20 percent. All eyes will be on the August 22 to 24 Jackson Hole Fed meeting for a sign of what’s to come.

Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at Adviser is not licensed to provide and does not provide legal, tax, or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.


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