July 11, 2024
When are these super high interest rates going to be cut? Well – we may have just gotten a hint with today’s inflation report. It says inflation is definitely trending down. Which makes the Federal Reserve happy. But there’s another new issue starting to creep up that the Fed isn’t so happy about. And all that goes into when interest rates will go down.
First – let’s talk about the latest inflation report. The Consumer Price Index was released this morning and says for the month of June overall inflation came down just by a little bit – 0.1%—month over month. But it’s still up 3% between June of 2024 and June of 2023. And yes – that’s for all items. Not excluding anything.
One of the big contributors to the drop is the price index for gasoline – which was down both month over month (-3.8%) and down 2.5% year over year. The price index for airfare dropped -5.1% between 2023 and 2024 (May vs June -5%). And the price index for used cars and trucks was down dramatically -10.1% year over year (May vs June -1.5%).
On the flip side shelter is still stubbornly high. That includes rent and mortgages. The shelter index was up 5.2% year over year and also up month over month (May vs June +0.2%). After sitting flat last month, food at the grocery store crept up just a little between May and June (+0.1%) and increased 1.1% between June 2023 and June 2024. And yes – that does include coffee – which was down -1.6% between June 2023 and June 2024 (May vs June +0.5%).
This is what the Fed wants to see. This is why interest rates have been sitting at a two-decade high for the last year. The whole point is to use the Fed’s most powerful tool – interest rates — to bring inflation back down to 2%. By keeping interest rates high – it forces people and businesses to pull their money out of circulation which slows down the price increases on goods and services. But there’s a new wrinkle in the Fed’s plan. And it’s the labor market. After being unbelievably strong coming out of the pandemic — it’s starting to show signs of weakening. Sure — the latest June jobs report found 206,000 jobs were added but it also found the unemployment rate ticked up again. It’s now sitting at 4.1%. Which is still relatively low but definitely higher than the lowest rate of 3.4% which we hit in April of 2023. By the way – before that, we hadn’t seen an unemployment rate of 3.4% since 1968.
So why am I telling you this? Well because the inflation numbers aren’t the only ones the Federal Reserve uses to determine when to cut interest rates. They use these jobs numbers too. And since we’re now seeing cooling in both the inflation numbers and labor numbers – that could give the Fed the confidence it needs to start cutting interest rates. While he won’t say when it’ll happen — the Federal Reserve chairman told lawmakers this week that keeping interest rates so high for too long can do real damage to the labor market and reverse the progress the Fed has made on inflation. And they don’t want to do that either. In case you don’t speak Fed chairman – that’s his way of saying – we see what’s happening and rate cuts are coming sooner rather than later – possibly as soon as September.
