Today’s inflation report shows: federal reserve Interest rates will be cut in 2024, not because of a collapse in the labor market, but because real interest rates are too high. Further rate cuts could be made if the labor market weakens, meaning the number of jobless claims exceeds the four-week rolling average of 323,000. The labor market is not yet set, so for now we can focus on the fact that the Fed has raised rates too much and therefore has room to cut rates.
The Fed can’t avoid the reality that existing home sales are at record lows and the Fed needs to get housing going again, which I discussed on this HousingWire Daily podcast.
Let’s take a closer look at this report to find out why the Fed can now discuss cutting interest rates next year.
From BLS: The U.S. Bureau of Labor Statistics announced today that the Consumer Price Index for all urban consumers (CPI-U) was flat in October, but a seasonally adjusted 0.1% in November. Rose. Over the past 12 months, the all-item index rose 3.1% before seasonal adjustment.
Tuesday’s report showed that inflation was slightly stronger than expected, but rents and used car prices, which are expected to have a long-term disinflationary outlook, pushed inflation higher. Excluding shelter inflation, the CPI remains at 1.4%, so lags in shelter data keep CPI reporting artificially higher than it should be, and the Fed knows it. There is. With real-time rent data, today’s core CPI would be even lower.
Shelter inflation also accounts for 44.4% of the index, making it the most important component of the CPI index. Back to September 2022 CNBC, We talked about falling rents, but this data line is so badly delayed that it will be an even more positive story in 2023. Everyone is on the same page on this, and the graph below also shows that shelter inflation is high, but in real terms it is much lower than it is today.
What does this mean for Wednesday’s Fed meeting? I’m not a Fed Axis fan. I don’t think the Fed will change course until the labor market collapses. So if we’re talking about a rate cut next year, it should have more to do with the Fed’s excessive rate hikes starting in 2022 to ensure the rate of inflation declines. Even if the central bank cuts interest rates several times in response to inflation trends, it may still continue its restrictive policy if the rate of inflation declines further.
The yield on the 10-year Treasury note is now 4.22%, down significantly from its recent peak of about 5%. So while the market has already eased financial conditions a bit, more is needed to get housing moving again. Currently, mortgage interest rates should be below 6%, but spreads in the mortgage market are still very limited. This needs to change because inflation growth is falling.
What I want to take away from today’s inflation data is that trend is on your side. This means that the growth rate of inflation has been declining for some time. The Fed’s policy remains too restrictive on housing, so we hope the Fed will sound the alarm and become pro-housing again and abandon its “stay at home” housing economic policy soon.
It is noteworthy that inflation has fallen without a job-loss recession. If the labor market weakens, bond yields will fall further as the Fed waits for action. I hope tomorrow at the Fed meeting we find they are on the same page and we can all land the plane.