Receding inflation and a softening labor market should lead to Fed easing

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Fed Nouvelles

Inflation,Macroeconomics,Unitedstates

The U.S. economy has decelerated recently. After growing at an annualized rate of 3.4% in Q4-2023, real GDP rose only 1.4% in the first quarter of this year.

We look for the economy to continue to expand in the next few quarters, albeit at rates that fall short of the 2.4% annual average growth rate that characterized the 2010-2019 economic expansion. Growth in real disposable income is not keeping pace with growth in real consumer spending at present. Consequently, some households are resorting to means, which likely are not sustainable, to maintain current levels of spending.

A welcome byproduct of slower economic growth and a softening labor market has been less upward pressure on consumer prices. The core CPI, which excludes the volatile prices of food and energy components, rose only 0.2% in May relative to the previous month, and it edged up by just 0.1% in June. We look for the FOMC to begin an easing cycle at its September 18 policy meeting with a 25 bps reduction in the target range for the federal funds rate.

 

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