The Fed’s favorite inflation index (PCE Core Services Ex-Energy & Housing) just clocked in the highest monthly increase since March, with an annualized rate of 3.81%. But one month doesn’t make the trend.
In the past we’ve always looked at 6-month moving averages, to smooth out month-to-month volatility. We suspect the Fed does the same, and it’s worth noting that the 6-month moving average was well above the Fed’s 2% inflation target when rates were cut in September. And we can see in the chart below that the moving average has begun to shallow out, as inflation remains sticky.
We’ve been consistent in our synopsis of persistent inflation, particularly in services. This persistence argued for a smaller rate cut or no cut in September, and argues for the Fed to consider a pause in future rate reductions. The bond market has voted similarly with 10 year Treasury rates higher by 60 bps and mortgage rates back at 7% since the 9/18 rate cut. A pause in the trajectory or velocity of the widely anticipated monetary easing path could be viewed as the weakening of what has been cited as a strong tailwind for markets and the economy.
We’ve been consistent in our synopsis of persistent inflation, particularly in services. This persistence argued for a smaller rate cut or no cut in September, and argues for the Fed to consider a pause in future rate reductions. The bond market has voted similarly with 10 year Treasury rates higher by 60 bps and mortgage rates back at 7% since the 9/18 rate cut. A pause in the trajectory or velocity of the widely anticipated monetary easing path could be viewed as the weakening of what has been cited as a strong tailwind for markets and the economy.
Consumers have continued to remain resilient in the face of rising prices, albeit with growing debt levels and a strained housing market. Along with recent inflation readings, the third quarter GDP growth estimate of 2.8% further challenges an aggressive, linear rate cutting schedule. However, if strain in the housing market is exacerbated, we could see a change in consumption trends. Housing is an important segment that affects consumer confidence, and in turn, spending. In terms of recession risk, we believe the housing market is first on the list of potential economic indicators that are worth following closely.
Another important factor to monitor when considering inflation and economic growth is the Federal deficit, which has been expanding rapidly. Money supply annualized growth (which had turned negative in 2023) has again turned positive, bringing cumulative annualized growth of 6.8% over the last 5 years (when compared to pre-pandemic levels). The monetarist in us recognizes the inflationary impact of money supply growth. One of the greatest challenges facing the Fed today is how to drain unprecedented levels of liquidity out of the system without hurting employment and consumer confidence?
For additional market insight, we encourage you to download our Q3 2024 Market Update. Click here to find our most recently published commentary.
Want to stay up-to-date on future AAMA content and commentary? Fill out the form below to subscribe to receive our quarterly updates.
The information and opinions in this report have been prepared by the investment staff of Advanced Asset Management Advisors (AAMA). This report is based upon information available to the public. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but AAMA makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute AAMA’s judgment and are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as a recommendation to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations.
Stay Up to Date
Want to stay up to date with fundamentally-driven market insight, economic analysis, and practice management advice?
Sign up to receive regular roundups of our content, delivered conveniently to your inbox.