The US economy is, says Guy Miller, head of macroeconomics at Zurich, in a very unusual place.
While unemployment has been rising, it remains below 5 per cent.
Falling gasoline prices mean consumer spending should get a boost, with the most recent forecast for US GDP growth for the third quarter of 2024 being 3 per cent, matching the level achieved in the second quarter.
Those are not, Miller says, the sort of data points typically associated with an economy requiring the stimulus of an interest rate cut.
He adds that the strong performance of the US equity market this year has also boosted the net worth of many in the US, increasing consumer confidence.
He describes cutting rates in this environment as “unusual”.
Jim Caron, chief investment officer within the portfolio solutions group at Morgan Stanley Investment Management, says the Federal Reserve’s intention to cut rates has been well signalled.
He says: “There is a clear focus by the Fed on the jobs market, and to quote [Fed chairman Jerome] Powell: 'The Fed is not welcoming further deterioration'.”
This raises a question of how fast or front-loaded rate cuts may be.
Although the Fed indicated that a pace of 50 basis points cut is not the norm, it did signal an additional 50bp of rate cuts by end of 2024 and another 100bp of cuts in 2025.
Additionally, this means the bond market – and equities too – will be especially sensitive to weaker jobs and economic data releases because it will dictate the pace of rate cuts.
In other words, there will be an asymmetry on more and fast rate cuts being priced in, in reaction to weak data, than priced out in reaction to strong data.
A cautious outlook
Bryn Jones, head of fixed income at Rathbones Investment Management, is more cautious on the outlook for the US economy, as he says some of the longer-term data points indicate a slowing economy, justifying a rate cut now.
Miller’s view is that inflation could prove more persistent in the coming year or so than the market is presently pricing, as service sector inflation remains high.
George Brown, senior US economist at Schroders, says a combination of the rate cut and the present good health of the economy could mean inflation picks up, but this time driven by an increased level of demand in the economy, rather than restrictions to the supply side of the economy – those being the cause of global inflation as the world emerged from the pandemic and the implications of Russia’s invasion of Ukraine took hold.
While US job data has been showing a moderate slowdown in growth, with the level of new jobs created monthly presently at about half the rate of previous quarters, the present rate of unemployment remains low by historic standards.
One part of the remit of the Fed is to maintain inflation at, or near, the 2 per cent level, while being mindful of inflation.
